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}\viewkind1\viewscale100\margl0\margr0\margt0\margb0\deftab80\dntblnsbdb\expshrtn\paperw12240\paperh15840{\bkmkstart Pg1}{\bkmkend Pg1}\par\pard\ql \li8044\sb0\sl-184\slmult0 \par\pard\ql\li8044\sb0\sl-184\slmult0 \par\pard\ql\li8044\sb0\sl-184\slmult0 \par\pard\ql\li8044\sb16\sl-184\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf2\f3\fs16 1900 K Street, NW\par\pard\sect\sectd\sbknone\cols2\colno1\colw7875\colsr160\colno2\colw4065\colsr160\ql \li739\sb56\sl-470\slmult0 \up0 \expndtw0\charscalex120 \ul0\nosupersub\cf1\f2\fs52 Dechet\par\pard\ql \li2203\sb0\sl-144\slmult0 \up0 \expndtw0\charscalex114 \ul0\nosupersub\cf2\f3\fs16 LLP\par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb89\sl-230\slmult0 \up0 \expndtw0\charscalex109 \ul0\nosupersub\cf3\f4\fs20 October 31,2013\par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb0\sl-230\slmult0 \par\pard\ql \li1463\sb25\sl-230\slmult0 \up0 \expndtw-2\charscalex100 SUBMITTED VIA INTERNET\par\pard\ql \li1468\sb0\sl-230\slmult0 \par\pard\ql \li1468\sb30\sl-230\slmult0 \up0 \expndtw0\charscalex106 Ms. Elizabeth Murphy\par\pard\ql \li1473\sb24\sl-230\slmult0 \up0 \expndtw0\charscalex106 Secretary\par\pard\ql \li1478\sb20\sl-230\slmult0 \up0 \expndtw0\charscalex106 Securities and Exchange Commission\par\pard\ql \li1488\sb19\sl-230\slmult0 \up0 \expndtw0\charscalex103 100 F Street, N.E.\par\pard\ql \li1468\sb29\sl-230\slmult0 \up0 \expndtw0\charscalex106 Washington, DC 20549\par\pard\column \ql \li20\sb23\sl-184\slmult0 \up0 \expndtw0\charscalex105 \ul0\nosupersub\cf2\f3\fs16 Washington, DC 20006-1110\par\pard\ql \li25\sb17\sl-184\slmult0\tx289 \up0 \expndtw-7\charscalex88 +1\tab \up0 \expndtw0\charscalex106 202 261 \up0 \expndtw0\charscalex106 3300 Main\par\pard\ql \li25\sb13\sl-184\slmult0\tx294 \up0 \expndtw-7\charscalex88 +1\tab \up0 \expndtw0\charscalex105 202 261 \up0 \expndtw0\charscalex112 3333 Fax\par\pard\ql \li20\sb8\sl-184\slmult0 \up0 \expndtw0\charscalex101 www.dechert.com\par\pard\ql \li8035\sb0\sl-184\slmult0 \par\pard\ql \li8035\sb0\sl-184\slmult0 \par\pard\ql \li20\sb58\sl-184\slmult0 \up0 \expndtw-7\charscalex100 THOMAS P. VARTANIAN\par\pard\ql \li20\ri1817\sb200\sl-201\slmult0 \up0 \expndtw0\charscalex105 thomas.vartanian@dechert.com \up0 \expndtw0\charscalex105 +1 202 261 3439 Direct \line \up0 \expndtw0\charscalex107 +1 202 261 3139 Fax \par\pard\sect\sectd\sbknone \qj \li1468\ri2012\sb62\sl-480\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf3\f4\fs20 Re: The Report on Asset Management and Financial Stability of the Ofice of Financial Research \up0 \expndtw0\charscalex103 Dear Ms. Murphy: \par\pard\qj \li1473\ri1308\sb202\sl-260\slmult0 \up0 \expndtw0\charscalex113 On behalf of certain clients of our Firm, we appreciate the opportunity the Securities and Exchange \line \up0 \expndtw0\charscalex108 Commission ("Commission" or the "SEC") has provided for public comment on the report issued by the \par\pard\ql \li1468\sb25\sl-230\slmult0\tx4857 \up0 \expndtw0\charscalex118 U.S. Ofice of Financial Research \tab \up0 \expndtw0\charscalex115 ("OFR") entitled "Asset Management and Financial Stability" \par\pard\qj \li1468\ri1306\sb0\sl-253\slmult0\fi4 \up0 \expndtw0\charscalex108 ("Report").1 We sincerely appreciate the efforts of the SEC to invite public participation in this process, \up0 \expndtw0\charscalex108 which has so many important ramiications. The leadership demonstrated by the SEC will be essential to \up0 \expndtw0\charscalex114 increasing the understanding of asset management in the regulatory community and analyzing any \up0 \expndtw0\charscalex104 potential regulatory policies in a rigorous, objective and transparent manner.2 \par\pard\qj \li1473\ri1311\sb238\sl-253\slmult0 \up0 \expndtw0\charscalex111 We submit for the SEC's consideration that the Report is fundamentally flawed in many respects and \up0 \expndtw0\charscalex118 analytically unreliable. In this comment letter, we focus on the flaws in the Report regarding its \up0 \expndtw0\charscalex107 assessment of risks that may be applicable to U.S. registered, floating net asset value ("NAV"), open-end \up0 \expndtw0\charscalex104 investment companies ("Funds") and their investment advisers. \par\pard\qj \li2183\sb0\sl-226\slmult0 \par\pard\qj\li2183\sb0\sl-226\slmult0 \par\pard\qj\li2183\sb0\sl-226\slmult0 \par\pard\qj\li2183\sb0\sl-226\slmult0 \par\pard\qj\li2183\sb0\sl-226\slmult0 \par\pard\qj\li2183\ri1259\sb20\sl-226\slmult0\fi9 \up0 \expndtw-1\charscalex100 Dechert is an intenational law irm which acts as legal counsel to financial services firms, asset managers \up0 \expndtw-2\charscalex100 and investment funds worldwide, representing clients ranging rom small start-up and boutique operations \up0 \expndtw0\charscalex100 to some of the largest inancial institutions in the world. In our practice, we represent approximately 50 \up0 \expndtw-2\charscalex100 mutual fund groups in the United States, amounting to hundreds of separate mutual funds. \par\pard\qj \li2188\sb0\sl-226\slmult0 \par\pard\qj\li2188\ri1258\sb28\sl-226\slmult0\fi9 \up0 \expndtw-1\charscalex100 We understand that some of our comments are basic and well-understood by the Commission. However, \up0 \expndtw0\charscalex100 we feel compelled to make them having been invited by the SEC to comment on the OFR Report. We \up0 \expndtw-1\charscalex100 presume that our comments along with the SEC's own views will be passed along to the OFR, and to the \up0 \expndtw-3\charscalex100 FSOC, which commissioned the Report and of which the SEC and OFR are both members. \par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg2}{\bkmkend Pg2}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8700\colsr160\colno2\colw3240\colsr160\ql \li710\sb0\sl-598\slmult0 \par\pard\ql \li710\sb66\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2174\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex103 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\ql \li1444\sb0\sl-253\slmult0 \par\pard\ql \li1444\sb0\sl-253\slmult0 \par\pard\ql \li1444\sb0\sl-253\slmult0 \par\pard\ql \li1444\sb0\sl-253\slmult0 \par\pard\ql \li1444\sb0\sl-253\slmult0 \par\pard\ql \li1444\sb118\sl-253\slmult0\tx2155 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\fs22 I.\tab \up0 \expndtw0\charscalex103 \ul0\nosupersub\cf6\f7\fs22\ul Executive Summary\par\pard\ql \li1444\sb232\sl-253\slmult0 \up0 \expndtw-4\charscalex100 \ul0\nosupersub\cf5\f6\fs22 The analysis in this comment may be summarized as follows:\par\pard\column \ql \li8860\sb0\sl-253\slmult0 \par\pard\ql \li8860\sb0\sl-253\slmult0 \par\pard\ql \li20\sb203\sl-253\slmult0 \up0 \expndtw-2\charscalex100 Ms. Elizabeth Murphy\par\pard\ql \li467\sb1\sl-253\slmult0 \up0 \expndtw-3\charscalex100 October 31, 2013\par\pard\ql \li1417\sb1\sl-249\slmult0 \up0 \expndtw-4\charscalex100 Page 2 \par\pard\sect\sectd\sbknone \ql \li2188\sb240\sl-253\slmult0\tx2870 \up0 \expndtw-10\charscalex76 1. \tab \up0 \expndtw0\charscalex102 Neither the Financial Stability Oversight Council ("FSOC") nor the OFR have laid the \par\pard\qj \li2875\ri1256\sb0\sl-253\slmult0 \up0 \expndtw-2\charscalex100 proper legal foundation to use the Report for its intended purpose to help the FSOC better \up0 \expndtw-1\charscalex100 understand asset management, any threats that may arise from it, any need for additional \up0 \expndtw0\charscalex104 regulation, and whether any such regulation should involve the designation authority \up0 \expndtw-2\charscalex100 under Section 113 of the Dodd-Frank Act ("DFA") or an alternative response. \par\pard\ql \li2174\sb234\sl-253\slmult0\tx2884 \up0 \expndtw-10\charscalex91 2. \tab \up0 \expndtw0\charscalex107 Reliance on the Report will taint the administrative record and provides a basis for \par\pard\qj \li2880\ri1285\sb13\sl-246\slmult0\fi4 \up0 \expndtw0\charscalex100 companies to challenge designation and other regulatory actions that attempt to rely on \line \up0 \expndtw0\charscalex100 the Report, including any recommendation for regulatory action such as any inal FSOC \line \up0 \expndtw0\charscalex100 proposed recommendations to the SEC regarding the regulation of money market funds \line \up0 \expndtw-4\charscalex100 ("MMFs"). \par\pard\ql \li2179\sb249\sl-253\slmult0\tx2889 \up0 \expndtw-10\charscalex91 3. \tab \up0 \expndtw-1\charscalex100 The Report has signiicant and substantive factual, analytical, and methodological defects \par\pard\qj \li2889\ri1264\sb2\sl-260\slmult0 \up0 \expndtw0\charscalex108 that render it completely unreliable and insuficient to form the basis of any policy \up0 \expndtw-4\charscalex100 determinations. \par\pard\ql \li2183\sb226\sl-253\slmult0\tx2899 \up0 \expndtw-10\charscalex91 4. \tab \up0 \expndtw0\charscalex100 It paints the widely diverse asset management industry with the same brush, and draws \par\pard\qj \li2894\ri1238\sb7\sl-253\slmult0 \up0 \expndtw0\charscalex109 conclusions about risks as if the industry were a monolith, failing to differentiate \up0 \expndtw0\charscalex104 adequately between different investment vehicles, structures, strategies, and entities, \up0 \expndtw0\charscalex105 which is essential to measuring, modeling and drawing any meaningful conclusions \up0 \expndtw-4\charscalex100 regarding individual vulnerabilities and systemic risks. \par\pard\li2198\sb250\sl-253\slmult0\fi0\tx2903 \up0 \expndtw0\charscalex101 5.\tab \up0 \expndtw0\charscalex101 It ignores that:\par\pard\li2198\sb236\sl-253\slmult0\fi705\tx3619 \up0 \expndtw0\charscalex101 a.\tab \up0 \expndtw0\charscalex102 Investors purchase shares of a Fund with the understanding that the potential for\par\pard\li2198\sb2\sl-253\slmult0\fi1420 \up0 \expndtw0\charscalex102 poor investment performance, including the loss of principal, is a natural and\par\pard\li2198\sb0\sl-249\slmult0\fi1420 \up0 \expndtw0\charscalex101 well-understood risk;\par\pard\li2198\sb243\sl-253\slmult0\fi705\tx3623 \up0 \expndtw0\charscalex101 b.\tab \up0 \expndtw0\charscalex102 Investors do not rely on the inancial strength of the investment adviser of a\par\pard\li2198\sb1\sl-253\slmult0\fi1420 \up0 \expndtw0\charscalex101 Fund; and\par\pard\ql \li2913\sb242\sl-253\slmult0\tx3623 \up0 \expndtw-10\charscalex89 c. \tab \up0 \expndtw-1\charscalex100 Volatility and fluctuation of a Fund's NAV are normal market features, and not \par\pard\ql \li3633\sb1\sl-237\slmult0 \up0 \expndtw-3\charscalex100 inappropriate risks that require extraordinary regulation and supervision. \par\pard\ql \li2208\sb250\sl-253\slmult0\tx2913 \up0 \expndtw-10\charscalex94 6. \tab \up0 \expndtw0\charscalex104 The Report's concerns regarding asset management risks are based on unsupported \par\pard\qj \li2913\ri1220\sb10\sl-250\slmult0\fi4 \up0 \expndtw-3\charscalex100 arguments, speculation or theories that investors will conclude that Funds are engaged in \up0 \expndtw0\charscalex108 undisclosed "reaching for yield" or "herding" behavior, which will trigger rapid \up0 \expndtw-4\charscalex100 redemptions by the shareholders who learn of such behavior. \par\pard\qj \li2212\sb0\sl-230\slmult0 \par\pard\qj\li2212\sb0\sl-230\slmult0 \par\pard\qj\li2212\ri1203\sb167\sl-230\slmult0 \up0 \expndtw-6\charscalex100 Concerns regarding Funds engaging in ire sales are dependent upon the premise that large numbers of \line \up0 \expndtw-9\charscalex97 investors will simultaneously develop concens about undisclosed "reaching for yield" or "herding," which \line \up0 \expndtw-9\charscalex97 will cause them to redeem their interests in Funds en masse, causing unaffiliated Funds to engage in wide-\par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg3}{\bkmkend Pg3}\par\pard\sect\sectd\sbknone\cols2\colno1\colw2724\colsr160\colno2\colw9216\colsr160\ql \li734\sb0\sl-598\slmult0 \par\pard\ql \li734\sb76\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2193\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex101 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\ql \li2174\sb0\sl-253\slmult0 \par\pard\ql \li2174\sb0\sl-253\slmult0 \par\pard\ql \li2174\sb0\sl-253\slmult0 \par\pard\ql \li2174\sb0\sl-253\slmult0 \par\pard\ql \li2174\sb0\sl-253\slmult0 \par\pard\ql \li2174\sb123\sl-253\slmult0 \up0 \expndtw-10\charscalex88 \ul0\nosupersub\cf5\f6\fs22 7.\par\pard\ql \li2174\sb0\sl-253\slmult0 \par\pard\ql \li2174\sb0\sl-253\slmult0 \par\pard\ql \li2174\sb239\sl-253\slmult0 \up0 \expndtw-10\charscalex88 8.\par\pard\ql \li2174\sb0\sl-253\slmult0 \par\pard\ql \li2174\sb0\sl-253\slmult0 \par\pard\ql \li2174\sb0\sl-253\slmult0 \par\pard\ql \li2174\sb0\sl-253\slmult0 \par\pard\ql \li2174\sb0\sl-253\slmult0 \par\pard\ql \li2174\sb244\sl-253\slmult0 \up0 \expndtw-10\charscalex94 9.\par\pard\ql \li2203\sb0\sl-253\slmult0 \par\pard\ql \li2203\sb0\sl-253\slmult0 \par\pard\ql \li2203\sb0\sl-253\slmult0 \par\pard\ql \li2203\sb236\sl-253\slmult0 \up0 \expndtw-10\charscalex88 10.\par\pard\ql \li2198\sb0\sl-253\slmult0 \par\pard\ql \li2198\sb0\sl-253\slmult0 \par\pard\ql \li2198\sb0\sl-253\slmult0 \par\pard\ql \li2198\sb0\sl-253\slmult0 \par\pard\ql \li2198\sb247\sl-253\slmult0 \up0 \expndtw-10\charscalex91 11.\par\pard\ql \li2203\sb0\sl-253\slmult0 \par\pard\ql \li2203\sb0\sl-253\slmult0 \par\pard\ql \li2203\sb239\sl-253\slmult0 \up0 \expndtw-10\charscalex89 12.\par\pard\column \ql \li8875\sb0\sl-253\slmult0 \par\pard\ql \li8875\sb0\sl-253\slmult0 \par\pard\ql \li6011\sb237\sl-253\slmult0 \up0 \expndtw-2\charscalex100 Ms. Elizabeth Murphy\par\pard\ql \li6462\sb1\sl-253\slmult0 \up0 \expndtw-3\charscalex100 October 31, 2013\par\pard\ql \li7417\sb1\sl-253\slmult0 \up0 \expndtw-5\charscalex100 Page 3\par\pard\qj \li2884\sb0\sl-249\slmult0 \par\pard\qj \li2884\sb0\sl-249\slmult0 \par\pard\qj \li2884\sb0\sl-249\slmult0 \par\pard\qj \li2884\sb0\sl-249\slmult0 \par\pard\qj \li2884\sb0\sl-249\slmult0 \par\pard\qj \li20\ri1239\sb76\sl-249\slmult0 \up0 \expndtw0\charscalex106 It fails to provide any substantiation or suficient data to support its speculation that \up0 \expndtw0\charscalex100 Funds are subject to significant redemption risk, or that "runs" on Funds would cause or \up0 \expndtw-4\charscalex100 amplify systemic risk.\par\pard\qj \li20\ri1243\sb249\sl-251\slmult0 \up0 \expndtw-2\charscalex100 By only acknowledging limited aspects of the SEC's comprehensive and well-tested legal \line \up0 \expndtw0\charscalex105 and regulatory regime governing Funds, contractual limitations and basic economic \line \up0 \expndtw0\charscalex104 realities and then proceeding with speculative discussions of risks as if none of these \line \up0 \expndtw0\charscalex104 factors would have any impact, the Report, does not adequately take into account the \line \up0 \expndtw0\charscalex100 myriad inherent structural safeguards that signiicantly mitigate the risks about which it \line \up0 \expndtw-5\charscalex100 speculates.\par\pard\qj \li2889\sb0\sl-251\slmult0 \par\pard\qj \li25\ri1236\sb2\sl-251\slmult0 \up0 \expndtw0\charscalex108 It fails to consider the stability and resiliency Funds demonstrated during the very \up0 \expndtw-1\charscalex100 economic crisis that led to the creation of the OFR and the FSOC, which shows that they \up0 \expndtw0\charscalex100 are viewed by investors as long-term investment vehicles and strongly suggests that the \up0 \expndtw-3\charscalex100 risk mitigating factors described in the preceding point are effective.\par\pard\qj \li25\ri1218\sb241\sl-254\slmult0\fi4 \up0 \expndtw0\charscalex100 The Report views the asset management industry unrealistically and improperly through \up0 \expndtw0\charscalex102 a prudential regulatory lens that is calibrated to the proprietary risk-taking activities of \up0 \expndtw0\charscalex109 banks or insurance companies, rather than the activities and purposes of the asset \up0 \expndtw-2\charscalex100 management industry, and ignores the fundamental difference between the role played by \up0 \expndtw-3\charscalex100 asset managers acting as agents for investors, as opposed to principals.\par\pard\qj \li30\ri1246\sb245\sl-249\slmult0 \up0 \expndtw0\charscalex103 The Report suffers rom a range of administrative defects and attempts to identify and \up0 \expndtw0\charscalex109 measure risks before establishing basic deinitions and metrics that the public can \up0 \expndtw-5\charscalex100 evaluate and use.\par\pard\qj \li30\ri1245\sb250\sl-250\slmult0 \up0 \expndtw-1\charscalex100 The SEC should act to ensure that its extensive understanding and regulatory perspective \up0 \expndtw0\charscalex105 in regard to the asset management industry is utilized to (a) correct the fundamental \up0 \expndtw0\charscalex102 defects in the Report and (b) help the FSOC better understand asset management, any \up0 \expndtw-1\charscalex100 threats that may arise rom it, any need for additional regulation, and the appropriate form \up0 \expndtw-5\charscalex100 of any such regulation. \par\pard\sect\sectd\sbknone \li1473\sb247\sl-253\slmult0\fi0\tx2183 \up0 \expndtw0\charscalex103 II.\tab \up0 \expndtw0\charscalex103 \ul0\nosupersub\cf6\f7\fs22\ul The Purpose of the Report\par\pard\qj \li1478\ri1232\sb223\sl-260\slmult0 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf5\f6\fs22 The Report's stated purpose is to respond to the request of the FSOC for the OFR to provide data and \up0 \expndtw-2\charscalex100 analysis that would inform the FSOC's analysis of whether and how to consider asset management irms \up0 \expndtw-3\charscalex100 for enhanced prudential standards and supervision under Section 113 of the DFA. \par\pard\qj \li1483\sb0\sl-246\slmult0 \par\pard\qj\li1483\ri1237\sb6\sl-246\slmult0 \up0 \expndtw0\charscalex100 The Report does not achieve its stated purpose. In fact, it seriously misstates the risks it discusses, or \up0 \expndtw-1\charscalex100 simply fails to provide adequate empirical support or analysis to substantiate those which it purports to \up0 \expndtw-3\charscalex100 identify. Reliance on the Report by the FSOC will taint the administrative record and provide a basis for \up0 \expndtw-4\charscalex100 challenging any designation actions by the FSOC that rely upon it. \par\pard\qj \li2193\sb0\sl-220\slmult0 \par\pard\qj\li2193\sb0\sl-220\slmult0 \par\pard\qj\li2193\ri1261\sb176\sl-220\slmult0 \up0 \expndtw-7\charscalex100 scale sales of assets to satisfy redemptions in concentrated markets that are highly subject to disruption. \up0 \expndtw-10\charscalex94 This chain of events is both highly unlikely and highly speculative. \par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg4}{\bkmkend Pg4}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8720\colsr160\colno2\colw3220\colsr160\ql \li734\sb0\sl-598\slmult0 \par\pard\ql \li734\sb66\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2193\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex103 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\ql \li1449\sb0\sl-253\slmult0 \par\pard\ql \li1449\sb0\sl-253\slmult0 \par\pard\ql \li1449\sb0\sl-253\slmult0 \par\pard\ql \li1449\sb0\sl-253\slmult0 \par\pard\ql \li1449\sb0\sl-253\slmult0 \par\pard\ql \li1449\sb123\sl-253\slmult0\tx2159 \up0 \expndtw0\charscalex109 \ul0\nosupersub\cf5\f6\fs22 III.\tab \up0 \expndtw0\charscalex103 \ul0\nosupersub\cf6\f7\fs22\ul The Report Contains Substantial Inaccuracies and Analytical Defects\par\pard\column \ql \li8880\sb0\sl-253\slmult0 \par\pard\ql \li8880\sb0\sl-253\slmult0 \par\pard\ql \li20\sb227\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Ms. Elizabeth Murphy\par\pard\ql \li466\sb1\sl-253\slmult0 \up0 \expndtw-3\charscalex100 October 31, 2013\par\pard\ql \li1421\sb2\sl-253\slmult0 \up0 \expndtw-3\charscalex100 Page 4 \par\pard\sect\sectd\sbknone \li2188\sb242\sl-253\slmult0\fi0\tx2884 \up0 \expndtw-2\charscalex100 1.\tab \up0 \expndtw-1\charscalex100 The Report Fails to Make Important Distinctions between Different Investment Vehicles\par\pard\ql \li2889\sb1\sl-233\slmult0 \up0 \expndtw-3\charscalex100 and Types of Investors \par\pard\qj \li1454\sb0\sl-250\slmult0 \par\pard\qj\li1454\ri1244\sb3\sl-250\slmult0\fi4 \up0 \expndtw0\charscalex107 The Report professes to cover the entire asset management industry in the United States, with the \up0 \expndtw0\charscalex111 exception of MMFs and private funds, and seeks to explain what systemic risks of this falsely \up0 \expndtw0\charscalex104 homogenized business exist. This is perhaps the single greatest law of the Report. It is impossible to \up0 \expndtw0\charscalex109 make sound conclusions or glean meaningful guidance without a more focused effort. The asset \up0 \expndtw0\charscalex103 management industry is diverse and varied in many respects that have signiicant implications for risk \up0 \expndtw0\charscalex100 assessment and analysis. Any syllogism that is based on an erroneous predicate is defective, and that is \up0 \expndtw-4\charscalex100 what OFR has done with the Report. \par\pard\qj \li1459\ri1222\sb246\sl-256\slmult0\fi4 \up0 \expndtw0\charscalex102 The Report generally treats all assets under management or administration the same, regardless of the \line \up0 \expndtw0\charscalex100 vehicle through which investors gain access to advisory services or the types of investors who gain this \line \up0 \expndtw0\charscalex106 access. For example, an investor who gains access to a Fund through a variable annuity product or \line \up0 \expndtw0\charscalex108 retirement account will behave differently than a retail investor investing through a self-directed \line \up0 \expndtw0\charscalex100 brokerage account or an institutional investor, including in times of market stress. The Report makes no \line \up0 \expndtw-3\charscalex100 attempt to consider these key factors, essentially treating all assets the same in terms of risk. \par\pard\li2179\sb247\sl-253\slmult0\fi0\tx2894 \up0 \expndtw0\charscalex107 2.\tab \up0 \expndtw0\charscalex108 The Report Does Not Adequately Recognize the Separation of Funds rom Their\par\pard\li2179\sb0\sl-249\slmult0\fi705 \up0 \expndtw0\charscalex107 Advisers\par\pard\qj \li1468\ri1212\sb241\sl-251\slmult0 \up0 \expndtw-2\charscalex100 In addition to failing to distinguish between investment products and types of investors, the Report does \up0 \expndtw0\charscalex103 not sufficiently address asset managers independently rom the products and entities for which they \up0 \expndtw-3\charscalex100 provide advisory services. Although the Report concedes that asset managers "act primarily as agentsf,]" \up0 \expndtw0\charscalex105 it does not effectively separate the risks that may apply to a Fund rom those that may apply to its \up0 \expndtw0\charscalex100 investment adviser.4 For example, the Report provides no basis or empirical data for determining that \up0 \expndtw-2\charscalex100 distress experienced by a manager will spread to the Funds it manages or vice versa. It is just presumed. \up0 \expndtw-3\charscalex100 Further, we are aware of no instances in the more than 70 year history of the Investment Company Act of \up0 \expndtw-4\charscalex100 1940 ("1940 Act") where this has occurred to any meaningful degree. \par\pard\qj \li1468\ri1273\sb248\sl-253\slmult0 \up0 \expndtw-3\charscalex100 Funds are separate legal entities from their investment advisers. Investors in a Fund receive shares of the \up0 \expndtw-3\charscalex100 Fund, which represent pro rata interests in the assets of the Fund, and the value of which fluctuates daily \up0 \expndtw0\charscalex109 based on the value of these assets. The inancial condition of the adviser has no bearing on the \up0 \expndtw-4\charscalex100 performance of the Fund's shares. \par\pard\qj \li1473\ri1245\sb247\sl-253\slmult0 \up0 \expndtw0\charscalex100 A primary purpose of the 1940 Act is to ensure the independence of each Fund by protecting it from \up0 \expndtw0\charscalex107 overreaching by investment advisers and other third parties to the detriment of the Fund and its \up0 \expndtw0\charscalex100 shareholders. As such, the 1940 Act imposes signiicant restrictions on Fund investment advisers and \up0 \expndtw-2\charscalex100 other Fund service providers, among others, and has the effect of separating the business affairs of a Fund \up0 \expndtw-2\charscalex100 from those of its investment adviser and distributor. In light of these requirements, the success or failure \up0 \expndtw0\charscalex100 of a Fund's adviser should have little or no direct impact on the assets of the Fund. That appears to be \up0 \expndtw-4\charscalex100 what actual market experience says to those who are listening. \par\pard\ql \li2188\sb0\sl-253\slmult0 \par\pard\ql\li2188\sb34\sl-253\slmult0 \up0 \expndtw-10\charscalex93 Report at 1. \par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg5}{\bkmkend Pg5}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8681\colsr160\colno2\colw3259\colsr160\ql \li695\sb0\sl-598\slmult0 \par\pard\ql \li695\sb56\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\column \ql \li8841\sb0\sl-230\slmult0 \par\pard\ql \li8841\sb0\sl-230\slmult0 \par\pard\ql \li8841\sb0\sl-230\slmult0 \par\pard\ql \li20\sb19\sl-230\slmult0 \up0 \expndtw0\charscalex108 \ul0\nosupersub\cf3\f4\fs20 Ms. Elizabeth Murphy\par\pard\ql \li466\sb19\sl-230\slmult0 \up0 \expndtw0\charscalex107 October 31, 2013 \par\pard\sect\sectd\sbknone \li2150\sb1\sl-191\slmult0\fi0\tx10243 \up2 \expndtw0\charscalex104 \ul0\nosupersub\cf4\f5\fs18 LLP\tab \dn4 \expndtw0\charscalex104 \ul0\nosupersub\cf3\f4\fs20 Page 5\par\pard\qj \li1416\sb0\sl-256\slmult0 \par\pard\qj\li1416\sb0\sl-256\slmult0 \par\pard\qj\li1416\sb0\sl-256\slmult0 \par\pard\qj\li1416\sb0\sl-256\slmult0 \par\pard\qj\li1416\sb0\sl-256\slmult0 \par\pard\qj\li1416\ri1328\sb102\sl-256\slmult0 \up0 \expndtw0\charscalex109 A Fund's investment adviser serves at the pleasure of the board and the shareholders of the Fund, and any \up0 \expndtw0\charscalex109 adviser may be terminated on short notice if it is deemed appropriate to do so.5 Thus, in the event that an \up0 \expndtw0\charscalex113 investment adviser experiences inancial dificulty or other issues that cause the adviser to be unable to \up0 \expndtw0\charscalex114 continue to properly serve a Fund, the adviser may be terminated, and the board may hire a different \up0 \expndtw0\charscalex113 adviser to manage the Fund's assets. In our experience, Fund boards are keenly focused on issues that \up0 \expndtw0\charscalex113 may impact the ability of an investment adviser to effectively serve a Fund, and will take appropriate \up0 \expndtw0\charscalex106 action to address any concerns. \par\pard\qj \li1430\ri1319\sb226\sl-254\slmult0 \up0 \expndtw0\charscalex112 The 1940 Act and the SEC's Rules thereunder also strictly regulate how assets of a Fund may be held, \up0 \expndtw0\charscalex115 providing signiicant barriers preventing an investment adviser or an afiliate rom seizing, abusing or \up0 \expndtw0\charscalex110 commingling the assets of a Fund.6 In effect, these provisions generally require a Fund to keep assets in \up0 \expndtw0\charscalex119 the custody of a federal or state regulated bank or certain other speciied entities such as a futures \up0 \expndtw0\charscalex112 commission merchants or foreign sub-custodians, and impose stringent limitations intended to prevent \up0 \expndtw0\charscalex110 personnel of the investment adviser rom misapplying Fund assets. Moreover, the use of bank custodians \up0 \expndtw0\charscalex112 insulates each Fund's assets from those of other Funds, preventing any direct spillover effects rom one \up0 \expndtw0\charscalex105 Fund to another in the event of distress. \par\pard\qj \li1444\ri1292\sb225\sl-256\slmult0\fi9 \up0 \expndtw0\charscalex108 Section 17 of the 1940 Act and Rule 17d-l thereunder have the effect of limiting the connections between \up0 \expndtw0\charscalex112 a Fund and its investment adviser and other afiliates in a way that is intended to insulate the Fund rom \up0 \expndtw0\charscalex111 the adviser and other afiliates. In this regard, Section 17(a), generally prohibits any "afiliated person" of \up0 \expndtw0\charscalex120 a registered investment company (a "irst-tier afiliate"), or any afiliated person of such person (a \up0 \expndtw0\charscalex112 "second-tier afiliate"), acting as principal, rom knowingly selling any security or other property to the \up0 \expndtw0\charscalex114 registered investment company, or from knowingly purchasing any security or other property from a \up0 \expndtw0\charscalex106 registered investment company. \par\pard\qj \li1463\ri1314\sb227\sl-253\slmult0\fi4 \up0 \expndtw0\charscalex114 Section 17(d) and Rule 17d-l also prohibit first- or second-tier afiliates rom acting as a principal to \line \up0 \expndtw0\charscalex113 participate or effect a transaction with a Fund that would constitute a "joint enterprise or other joint \line \up0 \expndtw0\charscalex110 arrangement or profit-sharing plan" (a "joint transaction"), without speciic relief from the SEC.8 Joint \line \up0 \expndtw0\charscalex110 transactions include generally any plan, contract, authorization or arrangement, or any practice or \par\pard\qj \li2179\sb0\sl-226\slmult0 \par\pard\qj\li2179\sb0\sl-226\slmult0 \par\pard\qj\li2179\ri1311\sb118\sl-226\slmult0\fi9 \up0 \expndtw-2\charscalex100 Section 15 of the 1940 Act (15 U.S.C. § 80a-15) requires either a Fund's board or the Fund's shareholders \line \up0 \expndtw-1\charscalex100 to consider whether to re-approve all advisory contracts with the Fund at least once annually, and that all \line \up0 \expndtw-2\charscalex100 advisory contracts must be terminable at any time, without penalty, by the board or the Fund's shareholders \line \up0 \expndtw-2\charscalex100 on not more than 60 days' notice. Under Section 15(c) of the 1940 Act (15 U.S.C. \up0 \expndtw-2\charscalex100 § \up0 \expndtw-2\charscalex100 80a-15(c)), an \par\pard\qj \li2183\ri1253\sb3\sl-240\slmult0 \up0 \expndtw-1\charscalex100 advisory contract may provide for an initial term of two years. Ater the expiration of this initial term, the \up0 \expndtw-3\charscalex100 contract must be re-approved by the board annually for it to continue. \par\pard\li1507\sb0\sl-230\slmult0\par\pard\li1507\sb14\sl-230\slmult0\fi676 \up0 \expndtw0\charscalex100 See Section 17(f) of the 1940 Act (15 U.S.C. § 80a-17(f)) and Rules 17f-l through 17f-7 thereunder (17\par\pard\li1507\sb15\sl-230\slmult0\fi681\tx3052 \up0 \expndtw-6\charscalex100 C.F.R. §§\tab \up0 \expndtw0\charscalex100 270.17f-l through 270.17f-7).\par\pard\li1507\sb230\sl-230\slmult0\fi681\tx4296\tx4463 \up0 \expndtw-1\charscalex100 Section 17(a) (15 U.S.C.\tab \up0 \expndtw-2\charscalex100 §\tab \up0 \expndtw0\charscalex100 80a-17(a)) is intended primarily to proscribe "a purchase or sale transaction\par\pard\li1507\sb1\sl-230\slmult0\fi696 \up0 \expndtw0\charscalex100 when a party to the transaction has both the ability and the pecuniary incentive to influence the actions of\par\pard\li1507\sb0\sl-230\slmult0\fi696\tx8342\tx8927\tx9432\tx9715 \up0 \expndtw0\charscalex100 the investment company." See Investment Company Act Release No.\tab \up0 \expndtw-7\charscalex100 10886\tab \up0 \expndtw-7\charscalex100 (Oct.\tab \up0 \expndtw0\charscalex100 2,\tab \up0 \expndtw0\charscalex100 1979), citing\par\pard\li1507\sb5\sl-230\slmult0\fi705 \up0 \expndtw0\charscalex100 Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate\par\pard\li1507\sb0\sl-226\slmult0\fi700 \up0 \expndtw0\charscalex100 Comm. on Banking and Currency, 76th Cong., 3d Sess., at 256-59 (1940).\par\pard\li1507\sb129\sl-230\slmult0\fi0\tx2193 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf7\f8\fs12 8\tab \dn4 \expndtw0\charscalex100 \ul0\nosupersub\cf3\f4\fs20 The requirement also applies to principal underwriters of the mutual fund and their afiliated persons.\par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg6}{\bkmkend Pg6}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8686\colsr160\colno2\colw3254\colsr160\ql \li695\sb0\sl-598\slmult0 \par\pard\ql \li695\sb76\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2160\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex101 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\column \ql \li8846\sb0\sl-253\slmult0 \par\pard\ql \li8846\sb0\sl-253\slmult0 \par\pard\ql \li20\sb212\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Ms. Elizabeth Murphy\par\pard\ql \li471\sb1\sl-249\slmult0 \up0 \expndtw-3\charscalex100 October 31, 2013\par\pard\ql \li1422\sb3\sl-253\slmult0 \up0 \expndtw-3\charscalex100 Page 6 \par\pard\sect\sectd\sbknone \li1406\sb0\sl-253\slmult0\par\pard\li1406\sb0\sl-253\slmult0\par\pard\li1406\sb0\sl-253\slmult0\par\pard\li1406\sb0\sl-253\slmult0\par\pard\li1406\sb0\sl-253\slmult0\par\pard\li1406\sb61\sl-253\slmult0\fi19 \up0 \expndtw-2\charscalex100 understanding concerning an enterprise or undertaking whereby a Fund and an affilial\par\pard\sect\sectd\sbknone \li1406\sb1\sl-253\slmult0\fi0 \up0 \expndtw-2\charscalex100 joint and several participation, or share in the proits of such enterprise or undertaking.\ul0\super\cf8\f9\fs16\ul0\super\cf8\f9\fs15 ?j\ul0\nosupersub\cf9\f10\fs14 9\par\pard\sect\sectd\sbknone \li1406\sb241\sl-253\slmult0\fi743\tx2860 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\fs22 3.\tab \up0 \expndtw-2\charscalex100 The Report Improperly Assesses Risks to Which Asset Managers are Subject and Fails to\par\pard\sect\sectd\sbknone \li1406\sb2\sl-253\slmult0\fi1459 \up0 \expndtw-2\charscalex100 Justify its Emphasis on Large Asset Managers\par\pard\qj \li1435\ri1211\sb225\sl-253\slmult0\fi4 \up0 \expndtw-2\charscalex100 While the Report seeks to establish a link between the fortunes of an investment adviser and the Funds it \line \up0 \expndtw0\charscalex106 manages without providing any support, it overstates and misunderstands the risks applicable to \line \up0 \expndtw-1\charscalex100 investment advisers themselves. Unlike banks, insurance companies, and other inancial institutions that \line \up0 \expndtw-2\charscalex100 invest their own assets as principals, investment advisers, in that capacity, are in the business of managing \line \up0 \expndtw-1\charscalex100 their clients' assets. Investment advisers to Funds earn revenues in the form of investment advisory fees \line \up0 \expndtw-2\charscalex100 that normally are based on a percentage of the Fund's net assets. For these reasons, investment advisers, \line \up0 \expndtw0\charscalex100 though not immune from failure, have been far less likely to fail than other inancial companies which \line \up0 \expndtw-2\charscalex100 operate balance sheet assets. Moreover, the desirable nature of the revenue stream rom managing Funds \line \up0 \expndtw0\charscalex102 and other assets also suggests that investment advisers are unlikely to disappear even in the event of \line \up0 \expndtw-2\charscalex100 insolvency, in the absence of engaging in other businesses with different risk and liability characteristics. \par\pard\qj \li1449\ri1233\sb248\sl-252\slmult0 \up0 \expndtw0\charscalex100 The data in the Report focuses primarily on large asset managers, implying that the more assets under \up0 \expndtw0\charscalex102 management an investment adviser has, the more systemic risk it may pose. The Report provides no \up0 \expndtw-3\charscalex100 support for this implication. Having more assets under management does not make an investment adviser \up0 \expndtw-2\charscalex100 more systemically important in the same way that having more balance sheet assets might be viewed as \up0 \expndtw-1\charscalex100 causing a bank or an insurance company to be more systemically important. It is important to note that \up0 \expndtw-2\charscalex100 assets under management are not assets of the adviser. The capital of an adviser is not used to support or \up0 \expndtw-2\charscalex100 stabilize investment performance of assets under management. Tellingly, the Report does not attempt to \up0 \expndtw0\charscalex100 state or imply that any one investment adviser or Fund is, or could be, large or important enough to be \up0 \expndtw-3\charscalex100 systemically signiicant solely by virtue of its investment activities.10 \par\pard\li2179\sb249\sl-253\slmult0\fi0\tx2894 \up0 \expndtw-4\charscalex100 4.\tab \up0 \expndtw-4\charscalex100 The Report Relies on Incorrect and Incomplete Data\par\pard\qj \li1468\ri1288\sb225\sl-255\slmult0 \up0 \expndtw0\charscalex102 Missing and inadequate data seriously limits the usefulness of the Report. The Report concedes that \line \up0 \expndtw-2\charscalex100 "there are limitations to the data currently available to measure, analyze, and monitor asset management \line \up0 \expndtw-2\charscalex100 irms and their diverse activities, and to evaluate their implications for inancial stability."11 It notes that \line \up0 \expndtw0\charscalex104 these gaps limit its ability to determine the inancial condition of asset managers, including Funds' \line \up0 \expndtw0\charscalex102 investment advisers, or even understand their operations. It therefore appears to acknowledge that \par\pard\ql \li2188\sb0\sl-253\slmult0 \par\pard\ql\li2188\sb214\sl-253\slmult0 \up0 \expndtw-10\charscalex96 See Rule 17d-1(c) under the 1940 Act (17 C.F.R. § 270.17d-l(c)). \par\pard\ql \li1497\sb167\sl-253\slmult0\tx2193 \up0 \expndtw-8\charscalex82 \ul0\nosupersub\cf9\f10\fs14 10 \tab \dn4 \expndtw-5\charscalex100 \ul0\nosupersub\cf5\f6\fs22 In fact, the Report ignores available data regarding the relatively small inluence of large players in the \par\pard\qj \li2193\ri1228\sb45\sl-232\slmult0\fi4 \up0 \expndtw-9\charscalex97 industry, both currently and over time. According to a recent Investment Company Institute ("ICI") report, \up0 \expndtw-2\charscalex100 "of the largest 25 fund complexes in 1995, only 15 remained in this top group in 2012." ICI, 2013 \up0 \expndtw-9\charscalex95 Investment Company Fact Book: A Review of Trends and Activity in the Investment Company Industry 24-\line \up0 \expndtw-8\charscalex100 25 (2013), available at http://www.icifactbook.org/pdf/2013_factbook.pdfCTact Book"). The Fact Book \up0 \expndtw-6\charscalex100 also notes that "the [Fund] industry had a Herindahl-Hirschman Index number of 465 as of December \up0 \expndtw-9\charscalex96 2012," where any number under 1,000 indicates a lack of concentration in an industry. Id. \par\pard\li1507\sb235\sl-253\slmult0\fi0\tx2198 \up3 \expndtw-6\charscalex93 \ul0\nosupersub\cf9\f10\fs14 ii\tab \dn4 \expndtw-10\charscalex93 \ul0\nosupersub\cf5\f6\fs22 Report at 2.\par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg7}{\bkmkend Pg7}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8734\colsr160\colno2\colw3206\colsr160\ql \li744\sb0\sl-598\slmult0 \par\pard\ql \li744\sb85\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2203\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex103 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\column \ql \li8894\sb0\sl-253\slmult0 \par\pard\ql \li8894\sb0\sl-253\slmult0 \par\pard\ql \li20\sb237\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Ms. Elizabeth Murphy\par\pard\ql \li476\sb1\sl-253\slmult0 \up0 \expndtw-3\charscalex100 October 31, 2013\par\pard\ql \li1421\sb1\sl-253\slmult0 \up0 \expndtw-3\charscalex100 Page 7 \par\pard\sect\sectd\sbknone \qj \li1468\sb0\sl-256\slmult0 \par\pard\qj\li1468\sb0\sl-256\slmult0 \par\pard\qj\li1468\sb0\sl-256\slmult0 \par\pard\qj\li1468\sb0\sl-256\slmult0 \par\pard\qj\li1468\sb0\sl-256\slmult0 \par\pard\qj\li1468\ri1256\sb17\sl-256\slmult0\fi9 \up0 \expndtw0\charscalex100 signiicant data and analysis is necessary in order to draw reasonable conclusions. This suggests a shoot, \up0 \expndtw0\charscalex100 ready, aim approach to regulation. If OFR receives the data, will it be willing to contradict the concerns \up0 \expndtw0\charscalex108 and conclusions it has prematurely identiied? Why the rush to judgment without the data? In the \up0 \expndtw0\charscalex102 absence of data necessary "to measure, analyze, and monitor asset management irms and their diverse \up0 \expndtw0\charscalex100 activities, and to evaluate their implications for inancial stability," isn't the only appropriate conclusion \up0 \expndtw-3\charscalex100 that you need more data? \par\pard\qj \li1478\ri1195\sb248\sl-252\slmult0\fi4 \up0 \expndtw0\charscalex102 In some cases, the data that actually is in the Report is misleading. Figures 1 and 2 of the Report are \line \up0 \expndtw-2\charscalex100 intended to "provide an overview of the asset management industry and its irms and activities."12 These \line \up0 \expndtw0\charscalex104 Figures form a key basis for many of the assertions and conclusions in the Report. Yet, the Report \line \up0 \expndtw0\charscalex100 concedes that the data in Figure 1 is subject to "double counting" because of "cross investing" among \line \up0 \expndtw0\charscalex100 asset managers. This is correct, but there are also other instances of double counting in the igures. For \line \up0 \expndtw-1\charscalex100 example, in the Fund context, an adviser oten will retain a subadviser to provide day-to-day investment \line \up0 \expndtw-1\charscalex100 management services to a Fund. In such a case, the Figures presumably would count that Fund's assets \line \up0 \expndtw-1\charscalex100 twice, as being under the management of the adviser and the subadviser, without regard to the fact that \line \up0 \expndtw-3\charscalex100 only the subadviser controls the day-to-day acquisition and disposition of the Fund's holdings. Further, it \line \up0 \expndtw-1\charscalex100 appears that the data on assets under management in the Figures include assets under "administration," \line \up0 \expndtw0\charscalex105 such as where an asset manager serves as a custodian for an employee benefit plan. Assets under \line \up0 \expndtw0\charscalex100 administration should be excluded rom the calculus because asset managers are not in the position to \line \up0 \expndtw-2\charscalex100 control these assets, much less their behavior in times of crisis. The data on assets under management also \line \up0 \expndtw0\charscalex100 includes substantial assets in vehicles that have signiicant limits on redeemability, such as closed-end \line \up0 \expndtw-3\charscalex100 funds and private funds, and in separate accounts maintained by private clients that do not issue shares. \par\pard\ql \li2212\sb248\sl-253\slmult0\tx2918 \up0 \expndtw-10\charscalex91 5. \tab \up0 \expndtw0\charscalex103 The Report Views Asset Management through the Inappropriate Lens of Prudential \par\pard\qj \li2918\ri1253\sb0\sl-240\slmult0 \up0 \expndtw0\charscalex105 Regulation and Incorrectly Implies that Fund Investors Rely on the Strength of the \up0 \expndtw-3\charscalex100 Investment Adviser \par\pard\qj \li1497\sb0\sl-250\slmult0 \par\pard\qj\li1497\ri1192\sb20\sl-250\slmult0 \up0 \expndtw0\charscalex100 The Report seems to view the asset management industry through a prudential regulatory lens that is \line \up0 \expndtw-1\charscalex100 simply not appropriate. Unlike banking regulation, securities regulation, including the Securities Act of \line \up0 \expndtw-10\charscalex94 1933 \up0 \expndtw-2\charscalex100 ("1933 Act"), the \up0 \expndtw-2\charscalex100 1940 Act and the Investment Advisers Act of 1940 \up0 \expndtw-2\charscalex100 ("Advisers Act"), \par\pard\qj \li1497\ri1266\sb0\sl-255\slmult0\fi4 \up0 \expndtw0\charscalex106 fundamentally is generally not designed to ensure the safety and soundness of institutions or the \line \up0 \expndtw0\charscalex100 protection of individuals' assets against investment losses.13 To the contrary, securities regulation is \line \up0 \expndtw-3\charscalex100 appropriately designed primarily to protect investors from informational disadvantages and raud through \line \up0 \expndtw0\charscalex102 disclosure and, in the investment company context, overreaching rom the adviser and its afiliates.14 \line \up0 \expndtw-2\charscalex100 Risk of loss is inherent in investing, unlike with insured bank deposit accounts. When an investor buys\par\pard\sect\sectd\sbknone\cols2\colno1\colw2052\colsr160\colno2\colw9888\colsr160\ql \li1516\sb0\sl-161\slmult0 \par\pard\ql \li1516\sb129\sl-161\slmult0 \up0 \expndtw-6\charscalex86 \ul0\nosupersub\cf9\f10\fs14 12\par\pard\ql \li1526\sb0\sl-138\slmult0 \par\pard\ql \li1526\sb0\sl-138\slmult0 \par\pard\ql \li1526\sb57\sl-138\slmult0 \up0 \expndtw-5\charscalex87 \ul0\nosupersub\cf7\f8\fs12 13\par\pard\ql \li1526\sb0\sl-161\slmult0 \par\pard\ql \li1526\sb0\sl-161\slmult0 \par\pard\ql \li1526\sb0\sl-161\slmult0 \par\pard\ql \li1526\sb0\sl-161\slmult0 \par\pard\ql \li1526\sb0\sl-161\slmult0 \par\pard\ql \li1526\sb0\sl-161\slmult0 \par\pard\ql \li1526\sb0\sl-161\slmult0 \par\pard\ql \li1526\sb108\sl-161\slmult0 \up0 \expndtw-6\charscalex82 \ul0\nosupersub\cf9\f10\fs14 14\par\pard\column \ql \li2212\sb0\sl-253\slmult0 \par\pard\ql \li20\sb48\sl-253\slmult0 \up0 \expndtw-10\charscalex93 \ul0\nosupersub\cf5\f6\fs22 Report at 3.\par\pard\qj \li2212\sb0\sl-231\slmult0 \par\pard\qj \li20\ri1217\sb10\sl-231\slmult0 \up0 \expndtw-9\charscalex96 See, e.g., Edward V. Murphy, Who Regulates Whom and How? An Overview of U.S. Financial Regulatory \line \up0 \expndtw-8\charscalex100 Policy for Banking and Securities Markets, Congressional Research Service (May 28, 2013), available at \line \up0 \expndtw-7\charscalex100 http://^>c.state.gov/documents/organization/211399.pdf; Franklin Allen and Richard Herring, Banking \line \up0 \expndtw-9\charscalex96 Regulation versus Securities Market Regulation, Wharton School Center for Financial Institutions Working \line \up0 \expndtw-9\charscalex96 Paper 01-29 (July 2001), available at http://finance.wharton.upenn.edu/-allenf/download/Vita/0129.pdf.\par\pard\qj \li2217\sb0\sl-230\slmult0 \par\pard\qj \li25\ri1228\sb6\sl-230\slmult0 \up0 \expndtw-5\charscalex100 See id. However, as discussed throughout Section IV below, the 1940 Act, the Rules thereunder, and \up0 \expndtw-9\charscalex97 related SEC guidance provide Funds with signiicant protection rom many of the potential risks outlined in \up0 \expndtw-10\charscalex94 the Report, including redemption risk and leverage risk. \par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg8}{\bkmkend Pg8}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8739\colsr160\colno2\colw3201\colsr160\ql \li744\sb0\sl-598\slmult0 \par\pard\ql \li744\sb66\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2203\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex104 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\column \ql \li8899\sb0\sl-253\slmult0 \par\pard\ql \li8899\sb0\sl-253\slmult0 \par\pard\ql \li20\sb232\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Ms. Elizabeth Murphy\par\pard\ql \li471\sb6\sl-253\slmult0 \up0 \expndtw-3\charscalex100 October 31, 2013\par\pard\ql \li1416\sb1\sl-253\slmult0 \up0 \expndtw-3\charscalex100 Page 8 \par\pard\sect\sectd\sbknone \qj \li1468\sb0\sl-250\slmult0 \par\pard\qj\li1468\sb0\sl-250\slmult0 \par\pard\qj\li1468\sb0\sl-250\slmult0 \par\pard\qj\li1468\sb0\sl-250\slmult0 \par\pard\qj\li1468\sb0\sl-250\slmult0 \par\pard\qj\li1468\ri1200\sb52\sl-250\slmult0\fi4 \up0 \expndtw-1\charscalex100 shares of a Fund, the investor specifically understands that their investment is subject to market volatility \up0 \expndtw0\charscalex104 and loss, including the potential to lose all of its value. Investment risk and market volatility are not \up0 \expndtw-3\charscalex100 problems with the system that need correcting, they are key features of the system. \par\pard\qj \li1468\ri1261\sb249\sl-252\slmult0 \up0 \expndtw-3\charscalex100 According to the Report, investors in Funds may believe that they can rely on the financial strength of the \line \up0 \expndtw0\charscalex103 sponsor to support a Fund in times of crisis. The Report offers no persuasive support for this claim. \line \up0 \expndtw-1\charscalex100 Repeatedly, the Report relies on events and analysis related to MMFs, which the Report claims are not \line \up0 \expndtw-3\charscalex100 within its scope, and a very limited set of short-term cash-like Funds. Given the unique attributes of these \line \up0 \expndtw-1\charscalex100 funds, which are not shared by Funds generally, the Report fails to provide meaningful support for this \line \up0 \expndtw0\charscalex106 claim. Floating NAV Funds are, by deinition, subject to luctuations in value, and no investor can \line \up0 \expndtw0\charscalex100 reasonably expect an adviser to prevent losses in such Funds. An investor chooses a Fund based on its \line \up0 \expndtw0\charscalex107 investment strategy and the perceived skill of the investment adviser to implement that strategy \line \up0 \expndtw-3\charscalex100 effectively, not based on the adviser's inancial condition or an implicit guarantee of principal protection. \par\pard\ql \li1478\sb248\sl-253\slmult0\tx2188 \up0 \expndtw-4\charscalex100 IV. \tab \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf6\f7\fs22\ul The Report Overstates the Vulnerability of Funds to Shocks and Understates the Legal \par\pard\ql \li2188\sb7\sl-253\slmult0 \up0 \expndtw0\charscalex104 Provisions and Structural Characteristics that Protect Funds from Shocks \par\pard\ql \li2222\sb227\sl-253\slmult0\tx2913 \up0 \expndtw-10\charscalex76 \ul0\nosupersub\cf5\f6\fs22 1. \tab \up0 \expndtw-2\charscalex100 The Report Ignores the Structural Characteristics of Funds that Protect Them from Risks \par\pard\qj \li1483\ri1242\sb248\sl-252\slmult0 \up0 \expndtw-3\charscalex100 Continuing with its theme of painting a diverse industry with the same, broad brush, the Report makes no \line \up0 \expndtw-1\charscalex100 effort to consider the structural and operational characteristics that provide Funds signiicant protection \line \up0 \expndtw-1\charscalex100 from the types of "shocks" discussed in the Report. Unlike most of the conclusions of the Report, these \line \up0 \expndtw0\charscalex100 protections are not theoretical. In our more than 35 years as a firm representing Funds, we have never \line \up0 \expndtw0\charscalex105 observed a loating NAV Fund of any signiicance failing to meet redemptions in accordance with \line \up0 \expndtw-4\charscalex100 applicable law. \par\pard\qj \li1483\ri1197\sb250\sl-250\slmult0 \up0 \expndtw-1\charscalex100 Funds have transparent, uncomplicated legal structures. They are organized as corporations or business \up0 \expndtw0\charscalex100 trusts, or as "series" thereof that have segregated assets and liabilities. They do not engage in multiple \up0 \expndtw-1\charscalex100 lines of business and are subject to asset diversiication requirements under securities and/or tax law. In \up0 \expndtw0\charscalex100 addition, as noted above, speciic statutory restrictions prohibit Funds from engaging in most types of \up0 \expndtw-4\charscalex100 transactions with their investment advisers. \par\pard\qj \li1492\ri1250\sb246\sl-255\slmult0 \up0 \expndtw-3\charscalex100 Funds have straightforward, highly scalable business models and have one product to sell - Fund shares. \line \up0 \expndtw-3\charscalex100 Funds do not engage in complicated business activities. As open-end vehicles, Funds are not permitted to \line \up0 \expndtw0\charscalex102 issue preferred shares. Funds typically outsource virtually all services necessary for their operation, \line \up0 \expndtw-3\charscalex100 including asset management, administration, maintenance of share ownership records, sales, and custody \line \up0 \expndtw-1\charscalex100 of Fund investments.15 As a result, Funds typically do not have employees in the normal sense; rather, \line \up0 \expndtw0\charscalex100 they have a board of directors or trustees and a small number of oficers responsible for taking certain \line \up0 \expndtw0\charscalex105 actions on behalf of the Funds, which oficers typically are employees of the adviser. In a striking \line \up0 \expndtw0\charscalex100 difference rom other sorts of financial companies, the purchasers of the "product" offered by a Fund -\line \up0 \expndtw-2\charscalex100 Fund investors - elect the board of directors and thus control the Fund's governance structure. \par\pard\li1516\sb0\sl-253\slmult0\par\pard\li1516\sb0\sl-253\slmult0\par\pard\li1516\sb0\sl-253\slmult0\par\pard\li1516\sb53\sl-253\slmult0\fi0\tx2212 \up0 \expndtw-9\charscalex100 15\tab \up0 \expndtw-8\charscalex100 These functions usually are performed by an investment adviser or subadviser, administrator, transfer\par\pard\li1516\sb1\sl-214\slmult0\fi700 \up0 \expndtw-9\charscalex100 agent, distributor and custodian, respectively.\par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg9}{\bkmkend Pg9}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8676\colsr160\colno2\colw3264\colsr160\ql \li681\sb0\sl-598\slmult0 \par\pard\ql \li681\sb47\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2145\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex101 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\column \ql \li8836\sb0\sl-230\slmult0 \par\pard\ql \li8836\sb0\sl-230\slmult0 \par\pard\ql \li8836\sb0\sl-230\slmult0 \par\pard\ql \li20\sb23\sl-230\slmult0 \up0 \expndtw0\charscalex108 \ul0\nosupersub\cf3\f4\fs20 Ms. Elizabeth Murphy\par\pard\ql \li471\sb25\sl-230\slmult0 \up0 \expndtw0\charscalex110 October 31,2013\par\pard\ql \li1422\sb24\sl-230\slmult0 \up0 \expndtw0\charscalex106 Page 9 \par\pard\sect\sectd\sbknone \qj \li1411\sb0\sl-240\slmult0 \par\pard\qj\li1411\sb0\sl-240\slmult0 \par\pard\qj\li1411\sb0\sl-240\slmult0 \par\pard\qj\li1411\sb0\sl-240\slmult0 \par\pard\qj\li1411\sb0\sl-240\slmult0 \par\pard\qj\li1411\ri1333\sb142\sl-240\slmult0 \up0 \expndtw0\charscalex113 Fund boards of directors or trustees are subject to state law iduciary duties and are responsible for the \line \up0 \expndtw0\charscalex113 oversight and supervision of a Fund's operations. Moreover, a core principle of the \up0 \expndtw0\charscalex113 1940 Act that \par\pard\qj \li1416\ri1327\sb8\sl-255\slmult0 \up0 \expndtw0\charscalex110 underlies a signiicant portion of the regulations promulgated by the SEC, is that a Fund board must have \line \up0 \expndtw0\charscalex111 sufficient independence from the Fund's investment adviser and other afiliated persons16 to ensure that \line \up0 \expndtw0\charscalex110 the Fund is operated for the beneit of investors, as opposed to others. In this regard, Section 10(a) of the \line \up0 \expndtw0\charscalex112 1940 Act requires that at least 40 percent of a Fund's board not be "interested persons," as that term is \line \up0 \expndtw0\charscalex112 deined in Section 2(a)(19) of the \up0 \expndtw0\charscalex112 1940 Act, of the Fund or its investment adviser or distributor \par\pard\qj \li1425\ri1329\sb0\sl-260\slmult0 \up0 \expndtw0\charscalex111 ("Independent Directors"), and most Funds currently are obligated under SEC Rules to have a majority \up0 \expndtw0\charscalex109 of Independent Directors.18 Recent data indicates that for 96.5 percent of mutual fund boards, at least 67 \up0 \expndtw0\charscalex105 percent of the board seats are held by Independent Directors.19 \par\pard\qj \li1430\ri1329\sb210\sl-250\slmult0 \up0 \expndtw0\charscalex110 The members of a Fund's board have a federally imposed iduciary duty to the Fund and its shareholders \line \up0 \expndtw0\charscalex109 under Section 36 of the 1940 Act in addition to their state law duties. The board serves as an independent \line \up0 \expndtw0\charscalex109 and important check on the inluence of the Fund's investment adviser and other affiliated persons. \par\pard\qj \li1440\ri1324\sb242\sl-260\slmult0 \up0 \expndtw0\charscalex114 Funds have transparent balance sheets, consisting of the investments held, which are subject to daily \line \up0 \expndtw0\charscalex110 mark-to-market valuation. They have modest liabilities. In addition, Funds generally invest in relatively \par\pard\ql \li1454\sb0\sl-230\slmult0 \par\pard\ql\li1454\sb0\sl-230\slmult0 \par\pard\ql\li1454\sb85\sl-230\slmult0\tx2160 \up0 \expndtw-7\charscalex86 \ul0\nosupersub\cf9\f10\fs14 16 \tab \dn4 \expndtw0\charscalex102 \ul0\nosupersub\cf3\f4\fs20 Section 2(a)(3) of the 1940 Act (15 U.S.C. § 80a-2(a)(3)) deines an "afiliated person" of another person \par\pard\qj \li2150\ri1276\sb49\sl-232\slmult0 \up0 \expndtw-1\charscalex100 to include, among others, any person directly or indirectly owning, controlling, or holding with power to \up0 \expndtw0\charscalex102 vote, 5% or more of the voting securities of the other person; any person 5% or more of whose voting \up0 \expndtw-2\charscalex100 securities are directly or indirectly owned, controlled, or held with power to vote, by the other person; any \up0 \expndtw0\charscalex100 person directly or indirectly controlling, controlled by, or under common control with, the other person; \up0 \expndtw-2\charscalex100 and, if the person is an investment company, any investment adviser or any member of an advisory board \up0 \expndtw-4\charscalex100 of the investment company. \par\pard\ql \li1468\sb190\sl-230\slmult0\tx2169 \up2 \expndtw-7\charscalex82 \ul0\nosupersub\cf9\f10\fs14 17 \tab \dn4 \expndtw-1\charscalex100 \ul0\nosupersub\cf3\f4\fs20 Section 2(a)(19) of the 1940 Act (15 U.S.C. § 80a-2(a)(19)) deines "interested person," with respect to a \par\pard\qj \li2164\ri1310\sb22\sl-240\slmult0 \up0 \expndtw0\charscalex107 registered investment company, to include any affiliated person of the company and that person's \line \up0 \expndtw0\charscalex102 immediate family, and any interested person of the investment adviser or principal underwriter of the \line \up0 \expndtw-4\charscalex100 company. \par\pard\li1468\sb209\sl-230\slmult0\fi9\tx2169 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf9\f10\fs14 18\tab \dn4 \expndtw0\charscalex100 \ul0\nosupersub\cf3\f4\fs20 See Role of Independent Directors of Investment Companies, Investment Company Act Release No. 24,816\par\pard\li1468\sb22\sl-230\slmult0\fi705 \up0 \expndtw0\charscalex100 (Jan. 2,2001).\par\pard\li1468\sb219\sl-230\slmult0\fi14\tx2183 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf9\f10\fs14 19\tab \dn4 \expndtw0\charscalex100 \ul0\nosupersub\cf3\f4\fs20 ICI./Indep. Dirs. Council, 2013 Directors Practices Study: Practices and Compensation 3.44 (2013).\par\pard\li1468\sb0\sl-230\slmult0\par\pard\li1468\sb30\sl-230\slmult0\fi0\tx2179\tx8280 \up2 \expndtw0\charscalex100 \ul0\nosupersub\cf7\f8\fs12 20\tab \dn4 \expndtw0\charscalex100 \ul0\nosupersub\cf3\f4\fs20 Indeed, the Supreme Court has held that the very ramework of the\tab \dn4 \expndtw0\charscalex100 1940 Act reflects Congress's\par\pard\qj \li2179\ri1322\sb8\sl-220\slmult0 \up0 \expndtw0\charscalex102 expectation that Fund boards will exercise the authority granted to them under state law to protect the \line \up0 \expndtw-3\charscalex100 interests of a Fund and its shareholders. See Kamen v. Kemper Fin. Svcs., 500 U.S. 90, 107 (1991); Burks \par\pard\ql \li2179\sb12\sl-230\slmult0\tx9849 \up0 \expndtw0\charscalex100 v. Lasker, 441 U.S. 471, 485 (1979). Moreover, Rule 38a-l under the 1940 Act (17 C.F.R § \tab \up0 \expndtw0\charscalex105 270.38a-l) \par\pard\qj \li2179\ri1288\sb0\sl-233\slmult0 \up0 \expndtw-2\charscalex100 requires a Fund's board to designate a chief compliance oficer to report directly to the board regarding the \up0 \expndtw-2\charscalex100 operation of the Fund's required written compliance program. In the adopting release for Rule 38a-l under \up0 \expndtw-2\charscalex100 the 1940 Act (17 C.F.R. § 270.38a-l), the SEC recognized that the Rule "provides fund boards with direct \up0 \expndtw-1\charscalex100 access to a single person with overall compliance responsibility for the fund who answers directly to the \up0 \expndtw-2\charscalex100 board. The rule provides the board with a powerful tool to exercise its oversight responsibilities over fund \up0 \expndtw0\charscalex100 compliance matters." See Compliance Programs for Investment Companies and Investment Advisers, \up0 \expndtw-3\charscalex100 Investment Company Act Release No. 26,299 (Dec. 17,2003). \par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg10}{\bkmkend Pg10}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8667\colsr160\colno2\colw3273\colsr160\ql \li676\sb0\sl-598\slmult0 \par\pard\ql \li676\sb66\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\column \ql \li8827\sb0\sl-230\slmult0 \par\pard\ql \li8827\sb0\sl-230\slmult0 \par\pard\ql \li8827\sb0\sl-230\slmult0 \par\pard\ql \li20\sb28\sl-230\slmult0 \up0 \expndtw0\charscalex108 \ul0\nosupersub\cf3\f4\fs20 Ms. Elizabeth Murphy\par\pard\ql \li471\sb25\sl-230\slmult0 \up0 \expndtw0\charscalex107 October 31, 2013 \par\pard\sect\sectd\sbknone \li2140\sb0\sl-184\slmult0\fi0\tx10123 \up3 \expndtw0\charscalex104 \ul0\nosupersub\cf4\f5\fs18 LLP\tab \dn4 \expndtw0\charscalex104 \ul0\nosupersub\cf3\f4\fs20 Page 10\par\pard\qj \li1396\sb0\sl-260\slmult0 \par\pard\qj\li1396\sb0\sl-260\slmult0 \par\pard\qj\li1396\sb0\sl-260\slmult0 \par\pard\qj\li1396\sb0\sl-260\slmult0 \par\pard\qj\li1396\sb0\sl-260\slmult0 \par\pard\qj\li1396\ri1342\sb91\sl-260\slmult0\fi4 \up0 \expndtw0\charscalex109 easy-to-value investments in light of an SEC position that requires the vast majority of Fund investments \up0 \expndtw0\charscalex104 to be in highly liquid assets that can be easily priced.21 \par\pard\ql \li2126\sb0\sl-230\slmult0 \par\pard\ql\li2126\sb15\sl-230\slmult0\tx2836 \up0 \expndtw-6\charscalex100 2. \tab \up0 \expndtw0\charscalex106 The Report Drastically Overstates the Vulnerability of Funds to Shocks \par\pard\qj \li1411\ri1335\sb250\sl-255\slmult0 \up0 \expndtw0\charscalex110 In addition to the claim that investment advisers are sources of risk, which we address above, the Report \up0 \expndtw0\charscalex112 describes three factors that it concludes make the asset management industry vulnerable to shocks: (1) \up0 \expndtw0\charscalex116 reaching for yield and herding behaviors; (2) redemption risk; and (3) leverage. The Report fails to \up0 \expndtw0\charscalex110 support its conclusions with respect to any of these three factors, particularly as they relate to Funds and \up0 \expndtw0\charscalex106 their investment advisers. \par\pard\li2851\sb0\sl-230\slmult0\par\pard\li2851\sb40\sl-230\slmult0\fi0\tx3566 \up0 \expndtw0\charscalex105 a.\tab \up0 \expndtw0\charscalex105 "Reaching for Yield\ul0\super\cf8\f9\fs16\ul0\super\cf8\f9\fs15 35\par\pard\qj \li1425\ri1328\sb245\sl-256\slmult0 \up0 \expndtw0\charscalex114 \ul0\nosupersub\cf3\f4\fs20 The Report concludes that portfolio managers may "reach for yield" to gain a competitive advantage \up0 \expndtw0\charscalex111 against their peers, including portfolio managers to Funds. The Report does not clearly deine or explain \up0 \expndtw0\charscalex113 this phenomenon, or how it differs rom normal market behavior relecting price discovery. Moreover, \up0 \expndtw0\charscalex110 the Report fails to provide the data or analysis necessary irst to conclude that this behavior is significant \up0 \expndtw0\charscalex116 in the Fund industry, or secondly, that Funds or managers may pose increased systemic risk if they \up0 \expndtw0\charscalex105 engage in it to any meaningful degree. \par\pard\qj \li1435\ri1330\sb241\sl-260\slmult0 \up0 \expndtw0\charscalex111 Funds must invest according to their principal investment strategies, and advisers to Funds have strong \line \up0 \expndtw0\charscalex111 incentives to invest according to these strategies to meet the expectations of shareholders. \up0 \expndtw0\charscalex108 Because \par\pard\ql \li1440\sb5\sl-230\slmult0\tx7655 \up0 \expndtw0\charscalex113 Funds continuously offer their shares, they are required under the \tab \up0 \expndtw0\charscalex115 1933 Act to maintain a "current" \par\pard\qj \li1440\ri1330\sb11\sl-253\slmult0\fi4 \up0 \expndtw0\charscalex113 prospectus, which must be updated at least annually. As the SEC well knows, it requires each Fund's \line \up0 \expndtw0\charscalex108 prospectus to describe the Fund's principal investment strategies.24 This disclosure must be complete and \line \up0 \expndtw0\charscalex112 not materially misleading.25 Investing in a manner that deviates from the prospectus disclosure could \line \up0 \expndtw0\charscalex108 subject the Fund, its investment adviser and its board to private suits and enforcement actions by the SEC \par\pard\ql \li1449\sb0\sl-230\slmult0 \par\pard\ql\li1449\sb76\sl-230\slmult0\tx2150 \up2 \expndtw-7\charscalex84 \ul0\nosupersub\cf9\f10\fs14 21 \tab \dn4 \expndtw0\charscalex103 \ul0\nosupersub\cf3\f4\fs20 Non-MMFs are subject to an SEC requirement to limit investments in securities and other instruments \par\pard\qj \li2155\ri1267\sb52\sl-228\slmult0\fi4 \up0 \expndtw-2\charscalex100 deemed illiquid (generally defined as investments that could not be sold at approximately the price at which \up0 \expndtw0\charscalex105 the fund has valued them within seven calendar days) to 15 percent of assets, measured at the time of \up0 \expndtw0\charscalex104 purchase. The SEC imposed this requirement to "assure that mutual funds will be able to make timely \up0 \expndtw0\charscalex104 payment for redeemed shares." See Revisions of Guidelines to Form N-1A, Investment Company Act \up0 \expndtw-1\charscalex100 Release No. 18612 (Mar. 12, 1992). The SEC requires mutual funds to take remedial action as promptly as \up0 \expndtw-1\charscalex100 possible in the event that more than iteen percent of a Fund's assets become illiquid. \par\pard\li1454\sb0\sl-230\slmult0\par\pard\li1454\sb33\sl-230\slmult0\fi0\tx2164 \up2 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs12 22\tab \dn4 \expndtw-2\charscalex100 \ul0\nosupersub\cf3\f4\fs20 Report at 9.\par\pard\li1454\sb0\sl-230\slmult0\par\pard\li1454\sb11\sl-230\slmult0\fi4\tx2160 \up3 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs12 23\tab \dn4 \expndtw-1\charscalex100 \ul0\nosupersub\cf3\f4\fs20 See Section 5 and Section 10(a)(3) of the 1933 Act (15 U.S.C. §§ 77e and j(a)(3)).\par\pard\li1454\sb0\sl-230\slmult0\par\pard\li1454\sb15\sl-230\slmult0\fi4\tx2174 \up2 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs12 24\tab \dn4 \expndtw-1\charscalex100 \ul0\nosupersub\cf3\f4\fs20 Item 4(a) of Form N-l A, available at http://www.sec.gov/about/forms/formn-la.pdf.\par\pard\li1454\sb220\sl-230\slmult0\fi9\tx2179\tx4463 \up3 \expndtw-1\charscalex100 \ul0\nosupersub\cf9\f10\fs14 25\tab \dn4 \expndtw-2\charscalex100 \ul0\nosupersub\cf3\f4\fs20 Section 11 of the 1933 Act\tab \dn4 \expndtw-1\charscalex100 (15 U.S.C. § 77k) has been read to impose strict liability on all the signers of\par\pard\qj \li2174\ri1264\sb0\sl-233\slmult0\fi4 \up0 \expndtw0\charscalex105 any registration statement containing an untrue statement of material fact or omitting a material fact \up0 \expndtw0\charscalex100 required to be stated or necessary to make the statement not misleading. In addition, Section 34(b) of the \up0 \expndtw-2\charscalex100 1940 Act (15 U.S.C. § 80a-33(b)) makes it unlawful for any person to make an untrue statement of material \up0 \expndtw-3\charscalex100 fact in a Fund's prospectus. \par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg11}{\bkmkend Pg11}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8667\colsr160\colno2\colw3273\colsr160\ql \li686\sb0\sl-598\slmult0 \par\pard\ql \li686\sb66\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2140\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex101 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\column \ql \li8827\sb0\sl-230\slmult0 \par\pard\ql \li8827\sb0\sl-230\slmult0 \par\pard\ql \li8827\sb0\sl-230\slmult0 \par\pard\ql \li20\sb28\sl-230\slmult0 \up0 \expndtw0\charscalex108 \ul0\nosupersub\cf3\f4\fs20 Ms. Elizabeth Murphy\par\pard\ql \li471\sb25\sl-230\slmult0 \up0 \expndtw0\charscalex111 October 31,2013\par\pard\ql \li1311\sb24\sl-230\slmult0 \up0 \expndtw0\charscalex104 Page 11 \par\pard\sect\sectd\sbknone \qj \li1401\sb0\sl-260\slmult0 \par\pard\qj\li1401\sb0\sl-260\slmult0 \par\pard\qj\li1401\sb0\sl-260\slmult0 \par\pard\qj\li1401\sb0\sl-260\slmult0 \par\pard\qj\li1401\sb0\sl-260\slmult0 \par\pard\qj\li1401\ri1338\sb21\sl-260\slmult0 \up0 \expndtw0\charscalex109 and state regulators.26 Because of these requirements, Funds' chief compliance oficers routinely monitor \up0 \expndtw0\charscalex110 compliance by investment advisers with prospectus disclosure regarding principal investment strategies, \up0 \expndtw0\charscalex106 under the oversight of the board. \par\pard\qj \li1406\ri1337\sb224\sl-256\slmult0\fi4 \up0 \expndtw0\charscalex120 The Report is unclear as to whether it views "reaching for yield" to be a risk that only would be \up0 \expndtw0\charscalex115 applicable in cases where a Fund invests in a manner that would violate its prospectus disclosure, or \up0 \expndtw0\charscalex111 whether reaching for yield could be problematic when a Fund invests in accordance with its prospectus \up0 \expndtw0\charscalex123 disclosure. If the Report is referring to the latter scenario, it does not explain why it would be \up0 \expndtw0\charscalex114 inappropriate for a Fund to invest in accordance with its disclosure, nor does it provide any potential \up0 \expndtw0\charscalex106 solutions to this alleged problem. \par\pard\qj \li1416\ri1331\sb225\sl-255\slmult0\fi9 \up0 \expndtw0\charscalex111 In any event, the Report speculates that a signiicant group of investors in a Fund suddenly could realize \up0 \expndtw0\charscalex114 that the portfolio manager is reaching for yield and quickly redeem their shares. The Report does not \up0 \expndtw0\charscalex111 explain how investors would discover this activity or under what conditions groups of investors may be \up0 \expndtw0\charscalex108 willing to redeem precipitously, and does not cite any examples of this type of event ever occurring in the \up0 \expndtw0\charscalex106 past with respect to a Fund. \par\pard\qj \li1425\ri1335\sb227\sl-253\slmult0 \up0 \expndtw0\charscalex116 The Report also indicates that "managers' incentives (for example, some performance fees) may be \up0 \expndtw0\charscalex110 structured so that managers share investors' gains on the upside but do not share investors' losses on the \up0 \expndtw0\charscalex115 downside, a situation that creates incentives to invest in riskier assets." However, the Report fails to \up0 \expndtw0\charscalex106 recognize that this structure is prohibited for Funds. \par\pard\qj \li1440\ri1318\sb247\sl-253\slmult0 \up0 \expndtw0\charscalex113 Consistent with its treatment of many other areas, the Report speaks of reaching for yield in a general \line \up0 \expndtw0\charscalex115 sense, without applying it to particular vehicles, sectors, or markets. Reaching for yield is a relative \line \up0 \expndtw0\charscalex110 concept - a manager would reach for yield within its investment strategy only relative to other managers \line \up0 \expndtw0\charscalex115 in similar strategies. However, even assuming that this phenomenon is signiicant, it only potentially \line \up0 \expndtw0\charscalex109 could be an issue for certain sectors or types or sizes of Funds. A portfolio manager reaching for yield in \line \up0 \expndtw0\charscalex115 a large capitalization equity Fund would present different, and lesser, risks than a portfolio manager \line \up0 \expndtw0\charscalex115 reaching for yield in a shallow market that is prone to liquidity problems, for example. Painting all \par\pard\ql \li1449\sb0\sl-230\slmult0 \par\pard\ql\li1449\sb56\sl-230\slmult0\tx2164 \up0 \expndtw-7\charscalex100 \ul0\nosupersub\cf9\f10\fs14 26 \tab \dn4 \expndtw0\charscalex100 \ul0\nosupersub\cf3\f4\fs20 The SEC has taken numerous enforcement actions against Funds and investment advisers in the past for \par\pard\qj \li2164\ri1270\sb48\sl-233\slmult0 \up0 \expndtw0\charscalex102 violations of prospectus disclosure. See, e.g., In the Matter of: Top Fund Management, Inc., Investment \up0 \expndtw0\charscalex105 Company Act Release Nos. 30315 (Dec. 21, 2012); In the Matter of: Pax World Management Corp., \up0 \expndtw-2\charscalex100 Investment Company Act Release Nos. 28344 (July 30, 2008); In the Matter of: Piper Capital Management, \up0 \expndtw-3\charscalex100 Inc., Investment Company Act Release Nos. 26167 (Aug. 26, 2003). \par\pard\li1454\sb0\sl-230\slmult0\par\pard\li1454\sb17\sl-230\slmult0\fi0\tx2164 \up2 \expndtw0\charscalex100 \ul0\nosupersub\cf7\f8\fs12 27\tab \dn4 \expndtw0\charscalex100 \ul0\nosupersub\cf3\f4\fs20 A systematic flaw in the Report that is demonstrated here is its propensity to offer a theoretical risk or\par\pard\li1454\sb0\sl-227\slmult0\fi715 \up0 \expndtw0\charscalex100 inancial catastrophe that has never occurred and build a set of assumptions and conclusions upon it. We\par\pard\li1454\sb7\sl-230\slmult0\fi715 \up0 \expndtw0\charscalex100 will rerain rom criticizing that kind of logic each time it occurs, but hope that the SEC will be able to\par\pard\li1454\sb0\sl-230\slmult0\fi720 \up0 \expndtw0\charscalex100 impose some discipline on OFR to evaluate and analyze realistic financial risks.\par\pard\li1454\sb0\sl-230\slmult0\par\pard\li1454\sb14\sl-230\slmult0\fi9\tx2174 \up3 \expndtw0\charscalex100 \ul0\nosupersub\cf7\f8\fs12 28\tab \dn4 \expndtw0\charscalex100 \ul0\nosupersub\cf3\f4\fs20 Report at 9.\par\pard\li1454\sb0\sl-230\slmult0\par\pard\li1454\sb15\sl-230\slmult0\fi14\tx2183 \up2 \expndtw0\charscalex100 \ul0\nosupersub\cf7\f8\fs12 29\tab \dn4 \expndtw0\charscalex100 \ul0\nosupersub\cf3\f4\fs20 Section 205(b) of the Advisers Act (15 U.S.C. § 80b-5(b)) prohibits an investment adviser rom charging a\par\pard\qj \li2179\ri1257\sb0\sl-230\slmult0 \up0 \expndtw0\charscalex100 performance fee to a Fund unless the adviser's compensation increases or decreases proportionately based \up0 \expndtw0\charscalex100 on the Fund's performance relative to an appropriate index or other measure of performance. This type of \up0 \expndtw-3\charscalex100 arrangement commonly is known as a "fulcrum fee." \par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg12}{\bkmkend Pg12}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8710\colsr160\colno2\colw3230\colsr160\ql \li720\sb0\sl-598\slmult0 \par\pard\ql \li720\sb76\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2183\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex101 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\column \ql \li8870\sb0\sl-253\slmult0 \par\pard\ql \li8870\sb0\sl-253\slmult0 \par\pard\ql \li20\sb217\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Ms. Elizabeth Murphy\par\pard\ql \li471\sb2\sl-253\slmult0 \up0 \expndtw-3\charscalex100 October 31, 2013\par\pard\ql \li1311\sb1\sl-253\slmult0 \up0 \expndtw-2\charscalex100 Page 12 \par\pard\sect\sectd\sbknone \qj \li1444\sb0\sl-260\slmult0 \par\pard\qj\li1444\sb0\sl-260\slmult0 \par\pard\qj\li1444\sb0\sl-260\slmult0 \par\pard\qj\li1444\sb0\sl-260\slmult0 \par\pard\qj\li1444\sb0\sl-260\slmult0 \par\pard\qj\li1444\ri1266\sb13\sl-260\slmult0\fi4 \up0 \expndtw0\charscalex103 investment products, including Funds, with the same brush renders the Report's conclusions basically \up0 \expndtw-5\charscalex100 useless. \par\pard\qj \li1449\ri1243\sb224\sl-256\slmult0\fi4 \up0 \expndtw0\charscalex100 Even viewing Funds in their entirety and assuming for the sake of argument that reaching for yield is a \up0 \expndtw0\charscalex100 real and significant phenomenon, the Report does not consider the possible existence of a countervailing \up0 \expndtw0\charscalex105 effect rom portfolio managers that are outperforming peers taking a more conservative approach to \up0 \expndtw0\charscalex100 "lock-in" relative performance. Just as it is unclear what the effects of reaching for yield are to Funds or \up0 \expndtw0\charscalex106 the markets in which they operate, it also is unclear whether and to what extent this countervailing \up0 \expndtw-4\charscalex100 practice erases these effects. \par\pard\li2884\sb231\sl-253\slmult0\fi0\tx3604 \up0 \expndtw-4\charscalex100 b.\tab \up0 \expndtw-4\charscalex100 "Herding"\par\pard\qj \li1463\ri1273\sb244\sl-252\slmult0 \up0 \expndtw-2\charscalex100 The Report states that competitive pressures may cause "asset managers to crowd into similar, or even the \up0 \expndtw0\charscalex100 same, assets at the same time."30 The Report concludes that this behavior could lead to adverse market \up0 \expndtw0\charscalex100 impacts. But it fails to substantiate this as a real problem, particularly for Funds. Moreover, the Report \up0 \expndtw-1\charscalex100 seems to suggest that herding behavior can occur both among asset managers and investors, but does not \up0 \expndtw-2\charscalex100 clearly explain these phenomena or quantify their separate risks, nor does it provide a method or model to \up0 \expndtw-3\charscalex100 determine how to discern herding rom normal market behavior. \par\pard\qj \li1468\ri1214\sb248\sl-252\slmult0 \up0 \expndtw0\charscalex103 The Report contains no empirical data as to the sectors or subsectors of the Fund industry in which it \up0 \expndtw0\charscalex102 believes that herding actually occurs or has occurred in the past. Moreover, it does not provide data or \up0 \expndtw0\charscalex100 analysis to support a conclusion that herding among Funds could have a noticeable impact on systemic \up0 \expndtw0\charscalex107 stability, as opposed to potentially increasing market volatility. There is simply no explanation or \up0 \expndtw0\charscalex100 description of how investors might detect herding behavior by a Fund's portfolio manager or under what \up0 \expndtw-4\charscalex100 circumstances this would be likely to lead to mass redemptions. \par\pard\qj \li1473\ri1216\sb250\sl-250\slmult0\fi9 \up0 \expndtw-1\charscalex100 Illiquid securities are at the most risk in the face of herding behavior, according to the Report, but it fails \up0 \expndtw-1\charscalex100 to take into account the SEC's limitations on investments by Funds in such securities. Funds are required \up0 \expndtw-3\charscalex100 to maintain the vast majority of their investments in securities and other holdings that are liquid.31 \par\pard\qj \li1483\ri1252\sb248\sl-253\slmult0 \up0 \expndtw0\charscalex100 Furthermore, there is no justiication for a conclusion that larger Funds are at a greater risk to engage in \up0 \expndtw-2\charscalex100 herding behavior, and therefore should be subject to enhanced restrictions that would not apply to smaller \up0 \expndtw0\charscalex100 entities or the market generally. By deinition, herding would be a behavior in which a large portion of a \up0 \expndtw-4\charscalex100 market would engage. \par\pard\li1492\sb235\sl-253\slmult0\fi1420\tx3623 \up0 \expndtw-1\charscalex100 c.\tab \up0 \expndtw-1\charscalex100 Redemption Risk\par\pard\li1492\sb251\sl-253\slmult0\fi0 \up0 \expndtw0\charscalex100 The Report states that "[a]ny collective investment vehicle offering unrestricted redemption rights could\par\pard\li1492\sb2\sl-253\slmult0\fi0 \up0 \expndtw0\charscalex100 face the risk of large redemption requests in a stressed market if investors believe that they will gain an\par\pard\li1497\sb0\sl-253\slmult0\par\pard\li1497\sb145\sl-253\slmult0\fi0\tx2208 \up2 \expndtw-6\charscalex96 \ul0\nosupersub\cf9\f10\fs14 30\tab \dn4 \expndtw-10\charscalex96 \ul0\nosupersub\cf5\f6\fs22 Report at 10.\par\pard\li1497\sb222\sl-253\slmult0\fi0\tx2203 \up2 \expndtw-6\charscalex96 \ul0\nosupersub\cf9\f10\fs14 31\tab \dn4 \expndtw-9\charscalex97 \ul0\nosupersub\cf5\f6\fs22 As noted above, the SEC requires that non-MMFs maintain no more than 15 percent of their portfolios in\par\pard\qj \li2208\ri1227\sb0\sl-230\slmult0 \up0 \expndtw-6\charscalex100 illiquid securities, measured at the time of purchase. Moreover, the SEC requires mutual funds to take \up0 \expndtw-4\charscalex100 remedial action as promptly as possible in the event that more than ifteen percent of a Fund's assets \up0 \expndtw-10\charscalex93 become illiquid. \par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg13}{\bkmkend Pg13}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8739\colsr160\colno2\colw3201\colsr160\ql \li744\sb0\sl-598\slmult0 \par\pard\ql \li744\sb76\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2208\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex104 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\column \ql \li8899\sb0\sl-230\slmult0 \par\pard\ql \li8899\sb0\sl-230\slmult0 \par\pard\ql \li8899\sb0\sl-230\slmult0 \par\pard\ql \li20\sb67\sl-230\slmult0 \up0 \expndtw0\charscalex108 \ul0\nosupersub\cf3\f4\fs20 Ms. Elizabeth Murphy\par\pard\ql \li471\sb29\sl-230\slmult0 \up0 \expndtw0\charscalex107 October 31, 2013\par\pard\ql \li1311\sb19\sl-230\slmult0 \up0 \expndtw0\charscalex105 Page 13 \par\pard\sect\sectd\sbknone \qj \li1473\sb0\sl-253\slmult0 \par\pard\qj\li1473\sb0\sl-253\slmult0 \par\pard\qj\li1473\sb0\sl-253\slmult0 \par\pard\qj\li1473\sb0\sl-253\slmult0 \par\pard\qj\li1473\sb0\sl-253\slmult0 \par\pard\qj\li1473\ri1263\sb43\sl-253\slmult0\fi4 \up0 \expndtw0\charscalex115 economic advantage by being the irst to redeem." This statement drastically overstates the potential \up0 \expndtw0\charscalex109 redemption risks faced by Funds for several reasons. In fact, as noted above, we are aware of no instance \up0 \expndtw0\charscalex113 in the more than 70 year history of the 1940 Act where a floating NAV Fund of any significance was \up0 \expndtw0\charscalex113 unable to meet redemptions in accordance with applicable law. This is in stark contrast to other large, \up0 \expndtw0\charscalex122 complex inancial institutions that offer demand accounts or have a complicated set of funding \up0 \expndtw0\charscalex112 relationships, which potentially make them subject to overwhelming liquidity demands when there is a \up0 \expndtw0\charscalex106 general loss of confidence by consumers. \par\pard\qj \li1478\ri1244\sb247\sl-253\slmult0\fi4 \up0 \expndtw0\charscalex108 Funds have a diverse base of predominantly individual customers who invest for retirement or other long\up0 \expndtw0\charscalex119 term goals. These investors requently hold their Fund shares in tax-advantaged accounts such as \up0 \expndtw0\charscalex110 individual retirement accounts ("IRAs"), or 529 plans that have penalties for early withdrawals.34 As of \up0 \expndtw0\charscalex111 2012, 92 percent of households that owned Funds held at least some shares inside workplace retirement \up0 \expndtw0\charscalex111 plans, IRAs, and other tax-deferred accounts.35 Institutional investors account for a distinct minority of \up0 \expndtw0\charscalex119 Fund ownership. As of 2012, data indicate that holdings of non-MMFs by institutional accounts \up0 \expndtw0\charscalex106 comprised only approximately four percent of Funds' total net assets.36 \par\pard\qj \li1488\sb0\sl-246\slmult0 \par\pard\qj\li1488\ri1272\sb7\sl-246\slmult0\fi4 \up0 \expndtw0\charscalex112 Investors also typically invest in Funds for the long term. With respect to mutual fund accounts held \line \up0 \expndtw0\charscalex106 outside of defined contribution retirement plans, the ICI reported that as of 2010, the average account had \line \up0 \expndtw0\charscalex111 been open for ive years. Significantly, even in September, October and November of 2008, the worst \line \up0 \expndtw0\charscalex111 period of the inancial crisis, Funds experienced net redemptions of approximately $60 billion, $128\par\pard\sect\sectd\sbknone\cols2\colno1\colw2048\colsr160\colno2\colw9892\colsr160\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb57\sl-138\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs12 32\par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb57\sl-138\slmult0 \up0 \expndtw-1\charscalex100 33\par\pard\ql \li1507\sb0\sl-138\slmult0 \par\pard\ql \li1507\sb0\sl-138\slmult0 \par\pard\ql \li1507\sb0\sl-138\slmult0 \par\pard\ql \li1507\sb0\sl-138\slmult0 \par\pard\ql \li1507\sb0\sl-138\slmult0 \par\pard\ql \li1507\sb0\sl-138\slmult0 \par\pard\ql \li1507\sb0\sl-138\slmult0 \par\pard\ql \li1507\sb0\sl-138\slmult0 \par\pard\ql \li1507\sb0\sl-138\slmult0 \par\pard\ql \li1507\sb7\sl-138\slmult0 \up0 \expndtw0\charscalex101 34\par\pard\ql \li1511\sb0\sl-161\slmult0 \par\pard\ql \li1511\sb0\sl-161\slmult0 \par\pard\ql \li1511\sb0\sl-161\slmult0 \par\pard\ql \li1511\sb0\sl-161\slmult0 \par\pard\ql \li1511\sb0\sl-161\slmult0 \par\pard\ql \li1511\sb0\sl-161\slmult0 \par\pard\ql \li1511\sb0\sl-161\slmult0 \par\pard\ql \li1511\sb117\sl-161\slmult0 \up0 \expndtw-6\charscalex93 \ul0\nosupersub\cf9\f10\fs14 35\par\pard\ql \li1511\sb0\sl-230\slmult0 \par\pard\ql \li1511\sb0\sl-230\slmult0 \par\pard\ql \li1511\sb0\sl-230\slmult0 \par\pard\ql \li1511\sb115\sl-230\slmult0 \up0 \expndtw0\charscalex59 \ul0\nosupersub\cf3\f4\fs20 36\par\pard\ql \li1511\sb0\sl-138\slmult0 \par\pard\ql \li1511\sb92\sl-138\slmult0 \up0 \expndtw0\charscalex105 \ul0\nosupersub\cf7\f8\fs12 37\par\pard\column \ql \li2208\sb0\sl-230\slmult0 \par\pard\ql \li2208\sb0\sl-230\slmult0 \par\pard\ql \li2208\sb0\sl-230\slmult0 \par\pard\ql \li2208\sb0\sl-230\slmult0 \par\pard\ql \li2208\sb0\sl-230\slmult0 \par\pard\ql \li2208\sb0\sl-230\slmult0 \par\pard\ql \li20\sb63\sl-230\slmult0 \up0 \expndtw-4\charscalex100 \ul0\nosupersub\cf3\f4\fs20 Report at 12.\par\pard\qj \li2212\sb0\sl-228\slmult0 \par\pard\qj \li24\ri1237\sb19\sl-228\slmult0 \up0 \expndtw0\charscalex106 We are aware of a limited number of relatively small Funds that have failed to meet redemptions in \up0 \expndtw-1\charscalex100 compliance with the Section 22(e) (15 U.S.C. § 80a-22(e)) requirements, but these failures generally were \up0 \expndtw0\charscalex103 caused by mismanagement or improper actions by personnel of the investment adviser or other service \up0 \expndtw0\charscalex100 providers. We are aware of no such cases involving a Fund family of relative signiicance in the industry, \up0 \expndtw-3\charscalex100 or any case that involved a spillover effect to the financial system at large.\par\pard\qj \li2212\sb0\sl-230\slmult0 \par\pard\qj \li24\ri1233\sb16\sl-230\slmult0\fi4 \up0 \expndtw-1\charscalex100 For example, according to data compiled by the ICI, in 2012, seventy-three percent of households owning \up0 \expndtw0\charscalex107 mutual iinds \up0 \expndtw0\charscalex110 (i.e., floating NAV' Funds) indicated that their primary inancial goal for their fund\par\pard\qj \li29\ri1249\sb5\sl-230\slmult0 \up0 \expndtw-2\charscalex100 investments was saving for retirement, and ninety-three percent of such households indicated that they were \up0 \expndtw0\charscalex100 using mutual funds to save for retirement. ICI, Characteristics of Mutual Fund Investors, 2012 6 (2012), \up0 \expndtw-1\charscalex100 available at http://www.ici.org/pdf/perl8-07.pdfCCharacteristics").\par\pard\qj \li2212\sb0\sl-230\slmult0 \par\pard\qj \li24\ri1225\sb15\sl-230\slmult0\fi4 \up0 \expndtw0\charscalex100 Fact Book at 94. Moreover, deined contribution retirement plans and IRA assets held in equity, bond and \up0 \expndtw-2\charscalex100 hybrid mutual Funds totaled $5.0 trillion and accounted for 48 percent of total investments in these types of \up0 \expndtw0\charscalex100 Funds. Id.\par\pard\ql \li2217\sb0\sl-230\slmult0 \par\pard\ql \li29\sb15\sl-230\slmult0 \up0 \expndtw0\charscalex101 Id at 105.\par\pard\qj \li2222\sb0\sl-225\slmult0 \par\pard\qj \li34\ri1242\sb20\sl-225\slmult0\fi4 \up0 \expndtw0\charscalex100 ICI, 2011 Investment Company Fact Book: A Review of Trends and Activity in the Investment Company \up0 \expndtw-1\charscalex100 Industry 88(2011). \par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg14}{\bkmkend Pg14}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8805\colsr60\colno2\colw3235\colsr160\ql \li710\sb0\sl-598\slmult0 \par\pard\ql \li710\sb76\sl-598\slmult0 \up0 \expndtw0\charscalex108 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2174\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex101 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\ql \li1444\sb0\sl-253\slmult0 \par\pard\ql \li1444\sb0\sl-253\slmult0 \par\pard\ql \li1444\sb0\sl-253\slmult0 \par\pard\ql \li1444\sb0\sl-253\slmult0 \par\pard\ql \li1444\sb0\sl-253\slmult0 \par\pard\ql \li1444\sb113\sl-253\slmult0 \up0 \expndtw0\charscalex104 \ul0\nosupersub\cf5\f6\fs22 billion and $41 billion, respectively, on a net asset base of almost $5.8 trillion.\par\pard\column \ql \li8865\sb0\sl-253\slmult0 \par\pard\ql \li8865\sb0\sl-253\slmult0 \par\pard\ql \li20\sb222\sl-253\slmult0 \up0 \expndtw-2\charscalex100 Ms. Elizabeth Murphy\par\pard\ql \li467\sb1\sl-249\slmult0 \up0 \expndtw-2\charscalex100 October 31, 2013\par\pard\ql \li1311\sb2\sl-253\slmult0 \up0 \expndtw-3\charscalex100 Page 14\par\pard\ql \li1440\sb0\sl-253\slmult0 \par\pard\ql \li1440\sb0\sl-253\slmult0 \par\pard\ql \li1440\sb0\sl-253\slmult0 \par\pard\ql \li1440\sb0\sl-253\slmult0 \par\pard\ql \li1440\sb0\sl-253\slmult0 \par\pard\ql \li236\sb61\sl-253\slmult0 \up0 \expndtw0\charscalex102 The Fund industry \par\pard\sect\sectd\sbknone \qj \li1440\ri1251\sb0\sl-260\slmult0\fi4 \up0 \expndtw-2\charscalex100 returned to more historic trends in terms of flows of funds quickly; in January of 2009, Funds experienced \line \up0 \expndtw0\charscalex102 net purchases of shares totaling $25 billion.40 Based on these experiences during the most severe and \line \up0 \expndtw0\charscalex100 widespread crisis in living memory, it is dificult to reasonably speculate that the two types of potential \line \up0 \expndtw-2\charscalex100 triggering events described in the Report could ever have any material impact on Fund redemptions. \par\pard\qj \li1444\ri1222\sb199\sl-254\slmult0\fi4 \up0 \expndtw0\charscalex100 The Report's contention that redemption risk is signiicant for floating NAV Funds is in direct contrast to \line \up0 \expndtw0\charscalex106 the FSOC's position that a floating NAV would be a solution to the FSOC's concern regarding the \line \up0 \expndtw0\charscalex105 purported rapid redemption risk for stable NAV MMFs. The FSOC indicated in its proposed MMF \line \up0 \expndtw0\charscalex100 reforms in November 2012 that a floating NAV, "would reduce ... the irst-mover advantage .. . because \line \up0 \expndtw-2\charscalex100 all redemptions would be priced at a fund's per share mark-to-market value."41 Funds are required by law \line \up0 \expndtw0\charscalex100 to value purchase and redemption orders for their shares at their NAV next-determined ater receipt of an \line \up0 \expndtw-2\charscalex100 order.42 Funds generally publish their NAVs daily at a set time, and shareholders are entitled to have their \line \up0 \expndtw0\charscalex105 purchase or redemption orders illed using the irst NAV that is set ater they submit their order. This \line \up0 \expndtw0\charscalex100 precludes the potential for mass redemptions of Fund shares based on the concern that redemptions will \line \up0 \expndtw0\charscalex108 be dilutive of the interests of shareholders. The Report makes no mention of these important and \line \up0 \expndtw-4\charscalex100 recognized features of Funds. \par\pard\qj \li1468\ri1233\sb248\sl-252\slmult0 \up0 \expndtw0\charscalex110 In addition to the structural impact of a floating NAV, Funds are equipped to handle signiicant \line \up0 \expndtw-1\charscalex100 redemptions in a short period of time. Funds generally are required to satisfy investors' share redemption \line \up0 \expndtw0\charscalex100 requests within seven days of tender.43 Funds can and do satisfy substantial redemptions as a matter of \line \up0 \expndtw0\charscalex100 course under all market conditions. Funds maintain a portion of their portfolios in cash or highly liquid \line \up0 \expndtw-1\charscalex100 cash equivalents in order to pay expected redemptions. Portfolio managers may increase or decrease this \line \up0 \expndtw0\charscalex100 portion to respond to market events and anticipated redemptions. In addition, as noted above, all Funds \line \up0 \expndtw0\charscalex102 are required to maintain the vast majority of their investments in securities and other holdings that are \line \up0 \expndtw0\charscalex100 liquid, meaning that Funds are in a position to raise cash to pay redemptions as long as the markets are \line \up0 \expndtw-5\charscalex100 operating. \par\pard\qj \li1483\ri1279\sb250\sl-250\slmult0 \up0 \expndtw0\charscalex100 Funds could possibly experience redemptions at a level that would be dificult to manage during market \line \up0 \expndtw0\charscalex105 disruptions of a more fundamental nature than those of 2008. However, the 1940 Act provides two \line \up0 \expndtw0\charscalex100 separate mechanisms that would allow Funds to remain operational in periods of extreme stress. First, \par\pard\li1488\sb0\sl-253\slmult0\par\pard\li1488\sb226\sl-253\slmult0\fi0\tx2203\tx7617\tx8414 \up4 \expndtw-6\charscalex96 \ul0\nosupersub\cf9\f10\fs14 38\tab \dn2 \expndtw-10\charscalex96 \ul0\nosupersub\cf5\f6\fs22 ICI, Long-Term Mutual Fund Flows Historical Data\tab \dn2 \expndtw-10\charscalex96 (2013),\tab \dn2 \expndtw-10\charscalex96 http://www.ici.org/info/flows\par\pard\li1488\sb1\sl-228\slmult0\fi705 \up0 \expndtw-10\charscalex96 _data_2013.xls ("Flows Data").\par\pard\li1488\sb222\sl-253\slmult0\fi4\tx2203 \up0 \expndtw-10\charscalex96 39\tab \up0 \expndtw-10\charscalex96 Fact Book at 144.\par\pard\li1488\sb222\sl-253\slmult0\fi4\tx2203 \up0 \expndtw-10\charscalex96 40\tab \up0 \expndtw-10\charscalex96 Flows Data.\par\pard\li1488\sb221\sl-253\slmult0\fi9\tx2198 \up3 \expndtw-6\charscalex96 \ul0\nosupersub\cf9\f10\fs14 41\tab \dn4 \expndtw-9\charscalex97 \ul0\nosupersub\cf5\f6\fs22 Proposed Recommendations Regarding Money Market Mutual Fund Reform, 11 Fed. Reg. 69455, 69467\par\pard\li1488\sb1\sl-221\slmult0\fi715 \up0 \expndtw-10\charscalex96 (Nov. 19,2012).\par\pard\li1488\sb251\sl-253\slmult0\fi9\tx2212 \up3 \expndtw-5\charscalex96 \ul0\nosupersub\cf7\f8\fs12 42\tab \dn4 \expndtw-9\charscalex97 \ul0\nosupersub\cf5\f6\fs22 Sections 22(c) and 2(a)(41) of, and Rules 22c-1 and 2a-4 under, the 1940 Act (15 U.S.C. §§ 80a-22(c),\par\pard\li1488\sb0\sl-198\slmult0\fi720 \up0 \expndtw-10\charscalex96 2\t \up0 \expndtw-10\charscalex96 (a)(41) and 17 C.F.R §§ 270.22c-l, 270.2a-4).\par\pard\li1488\sb251\sl-253\slmult0\fi14\tx2217 \up3 \expndtw-5\charscalex96 \ul0\nosupersub\cf7\f8\fs12 43\tab \dn4 \expndtw-10\charscalex96 \ul0\nosupersub\cf5\f6\fs22 Section 22(e) of the 1940 Act (15 U.S.C. § 80a-22(e)).\par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg15}{\bkmkend Pg15}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8705\colsr160\colno2\colw3235\colsr160\ql \li715\sb0\sl-598\slmult0 \par\pard\ql \li715\sb56\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2179\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex101 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\column \ql \li8865\sb0\sl-230\slmult0 \par\pard\ql \li8865\sb0\sl-230\slmult0 \par\pard\ql \li8865\sb0\sl-230\slmult0 \par\pard\ql \li20\sb33\sl-230\slmult0 \up0 \expndtw0\charscalex108 \ul0\nosupersub\cf3\f4\fs20 Ms. Elizabeth Murphy\par\pard\ql \li471\sb20\sl-230\slmult0 \up0 \expndtw0\charscalex111 October 31,2013\par\pard\ql \li1307\sb24\sl-230\slmult0 \up0 \expndtw0\charscalex107 Page 15 \par\pard\sect\sectd\sbknone \qj \li1440\sb0\sl-256\slmult0 \par\pard\qj\li1440\sb0\sl-256\slmult0 \par\pard\qj\li1440\sb0\sl-256\slmult0 \par\pard\qj\li1440\sb0\sl-256\slmult0 \par\pard\qj\li1440\sb0\sl-256\slmult0 \par\pard\qj\li1440\ri1296\sb44\sl-256\slmult0\fi9 \up0 \expndtw0\charscalex112 Section 22(e)(1) permits Funds to postpone the payment date during any period during which the New \line \up0 \expndtw0\charscalex110 York Stock Exchange is closed other than customary week-end and holiday closings.44 Presumably, the \line \up0 \expndtw0\charscalex116 New York Stock Exchange would be likely to close during the sorts of episodes of extreme market \line \up0 \expndtw0\charscalex115 distress that might cause mass redemptions in Funds. Such a suspension of redemption rights would \line \up0 \expndtw0\charscalex111 immobilize Fund assets without any further action necessary on the part of the SEC, until the Exchange \line \up0 \expndtw0\charscalex106 opened again. \par\pard\qj \li1449\ri1301\sb225\sl-255\slmult0 \up0 \expndtw0\charscalex110 In addition, a Fund may suspend redemptions in emergency situations where it would not be reasonably \line \up0 \expndtw0\charscalex113 practicable for the Fund to dispose of its securities or to determine its NAV.45 The SEC is directed to \line \up0 \expndtw0\charscalex117 determine the conditions under which such an emergency exists, and could promptly make such a \line \up0 \expndtw0\charscalex108 determination, providing Funds the ability to suspend redemptions in certain circumstances in reliance on \line \up0 \expndtw0\charscalex100 this provision.46\par\pard\sect\sectd\sbknone\cols2\colno1\colw10626\colsr20\colno2\colw1454\colsr160\ql \li1454\sb0\sl-230\slmult0 \par\pard\ql \li1454\sb24\sl-230\slmult0 \up0 \expndtw0\charscalex111 Finally, the SEC is authorized to order suspensions of redemptions to protect a Fund's shareholders.\par\pard\column \ql \li10646\sb0\sl-92\slmult0 \par\pard\ql \li10646\sb0\sl-92\slmult0 \par\pard\ql \li20\sb21\sl-92\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf10\f11\fs8 A T \par\pard\sect\sectd\sbknone \qj \li1459\ri1297\sb38\sl-240\slmult0 \up0 \expndtw0\charscalex108 \ul0\nosupersub\cf3\f4\fs20 The SEC has granted such relief in the past in a variety of situations, typically in circumstances in which a \up0 \expndtw0\charscalex108 Fund's investments are, for one reason or another, dificult to value correctly.48 \par\pard\qj \li1459\ri1298\sb244\sl-260\slmult0\fi4 \up0 \expndtw0\charscalex117 If the SEC believed that a Fund in need of such relief would never be in a position to recommence \up0 \expndtw0\charscalex110 operations, it also could seek to appoint a receiver to conduct the orderly liquidation of the Fund once it \up0 \expndtw0\charscalex104 has ordered the suspension of redemptions.49 \par\pard\li1463\sb0\sl-230\slmult0\par\pard\li1463\sb0\sl-230\slmult0\par\pard\li1463\sb62\sl-230\slmult0\fi0\tx2183 \up2 \expndtw0\charscalex100 \ul0\nosupersub\cf7\f8\fs12 44\tab \dn4 \expndtw0\charscalex100 \ul0\nosupersub\cf3\f4\fs20 Section 22(e)(1) (15 U.S.C. § 80a-22(e)) also permits Funds to postpone redemptions when trading on the\par\pard\li1463\sb2\sl-230\slmult0\fi710 \up0 \expndtw0\charscalex100 New York Stock Exchange is restricted. The SEC is required to determine the conditions under which\par\pard\li1463\sb1\sl-230\slmult0\fi710 \up0 \expndtw-1\charscalex100 trading is deemed to be restricted.\par\pard\li1463\sb0\sl-230\slmult0\par\pard\li1463\sb8\sl-230\slmult0\fi9\tx2179 \up3 \expndtw0\charscalex100 \ul0\nosupersub\cf7\f8\fs12 45\tab \dn4 \expndtw-1\charscalex100 \ul0\nosupersub\cf3\f4\fs20 See Section 22(e)(2) of the 1940 Act (15 U.S.C. § 80a-22(e)(2)).\par\pard\li1463\sb221\sl-230\slmult0\fi9\tx2183\tx5836\tx6163 \up4 \expndtw0\charscalex100 \ul0\nosupersub\cf9\f10\fs14 46\tab \dn4 \expndtw-1\charscalex100 \ul0\nosupersub\cf3\f4\fs20 See, e.g., MSB Fund, Inc. (pub. avail. Feb.\tab \dn4 \expndtw-9\charscalex90 10,\tab \dn4 \expndtw-1\charscalex100 1995) (stating that the SEC staff would not recommend\par\pard\qj \li2183\ri1217\sb11\sl-230\slmult0\fi4 \up0 \expndtw-1\charscalex100 enforcement against a fund for not mailing redemption checks while the entity that served as its investment \up0 \expndtw0\charscalex105 adviser, administrator, transfer agent, and custodian had its assets rozen and prior to the assets being \up0 \expndtw-2\charscalex100 released by the entity's regulator); Investment Co. Institute (pub. avail. Mar. 20, 1986) (stating that the SEC \up0 \expndtw0\charscalex103 staff would not recommend enforcement against municipal bond funds that had suspended the right of \up0 \expndtw0\charscalex102 redemption and had not calculated its net asset value under Section 22(e)(2) (15 U.S.C. § 80a-22(e)(2)) \up0 \expndtw0\charscalex100 when an emergency condition existed in the municipal bond market making it not reasonably practicable \up0 \expndtw-4\charscalex100 for the funds to value their net assets). \par\pard\li1483\sb0\sl-230\slmult0\par\pard\li1483\sb22\sl-230\slmult0\fi0\tx2188 \up3 \expndtw0\charscalex100 \ul0\nosupersub\cf7\f8\fs12 47\tab \dn4 \expndtw-1\charscalex100 \ul0\nosupersub\cf3\f4\fs20 See Section 22(e)(3) of the 1940 Act (15 U.S.C. § 80a-22(e)(3)).\par\pard\li1483\sb0\sl-230\slmult0\par\pard\li1483\sb15\sl-230\slmult0\fi4\tx2193 \up2 \expndtw0\charscalex100 \ul0\nosupersub\cf7\f8\fs12 48\tab \dn4 \expndtw0\charscalex100 \ul0\nosupersub\cf3\f4\fs20 See, e.g., In the Matter of: Centurion Growth Fund, Inc., Investment Company Act Release Nos. 20204\par\pard\li1483\sb2\sl-230\slmult0\fi715\tx2942\tx4896\tx5217 \up0 \expndtw-1\charscalex100 (Apr. 7,\tab \up0 \expndtw-2\charscalex100 1994) and 20210 (Apr.\tab \up0 \expndtw-9\charscalex90 11,\tab \up0 \expndtw-1\charscalex100 1994); The OTC-100 Fund, Inc., Investment Company Act Release\par\pard\li1483\sb1\sl-230\slmult0\fi710\tx2668\tx3988\tx5990\tx6316 \up0 \expndtw-5\charscalex100 Nos.\tab \up0 \expndtw-2\charscalex100 16846 (Mar. 3,\tab \up0 \expndtw-1\charscalex100 1989) and 16866 (Mar.\tab \up0 \expndtw-9\charscalex90 15,\tab \up0 \expndtw-1\charscalex100 1989); In the Matter of Suspension of Redemption of\par\pard\qj \li2203\ri1244\sb0\sl-240\slmult0 \up0 \expndtw-1\charscalex100 Open-End Investment Company Shares Because of the Current Weather Emergency, Investment Company \up0 \expndtw-4\charscalex100 Act Release No. 10113 (Feb. 7, 1978). \par\pard\ql \li1492\sb171\sl-230\slmult0\tx2198 \up2 \expndtw-7\charscalex100 \ul0\nosupersub\cf9\f10\fs14 49 \tab \dn4 \expndtw-1\charscalex100 \ul0\nosupersub\cf3\f4\fs20 See, e.g., SEC v. Alpine Mutual Fund Trust, Civil Action No. 91-2027, SEC Litigation Release No. 13101 \par\pard\qj \li2198\ri1302\sb50\sl-230\slmult0\fi4 \up0 \expndtw0\charscalex100 (Nov. 21, 1991) (seeking to have a receiver appointed for failure by a fund to timely redeem its shares \line \up0 \expndtw-2\charscalex100 under Section 22(e), among other issues); Sec. & Exch. Comm'n v. Charles W. Steadman, SEC Litigation \line \up0 \expndtw-3\charscalex100 Release No. 12167 (July 17, \up0 \expndtw-2\charscalex100 1989) (seeking to have a receiver appointed where, in violation of Section \par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg16}{\bkmkend Pg16}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8672\colsr160\colno2\colw3268\colsr160\ql \li681\sb0\sl-598\slmult0 \par\pard\ql \li681\sb66\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2145\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex101 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\column \ql \li8832\sb0\sl-253\slmult0 \par\pard\ql \li8832\sb0\sl-253\slmult0 \par\pard\ql \li20\sb188\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Ms. Elizabeth Murphy\par\pard\ql \li466\sb2\sl-253\slmult0 \up0 \expndtw0\charscalex101 October 31,2013\par\pard\ql \li1311\sb1\sl-253\slmult0 \up0 \expndtw-3\charscalex100 Page 16 \par\pard\sect\sectd\sbknone \qj \li1411\sb0\sl-252\slmult0 \par\pard\qj\li1411\sb0\sl-252\slmult0 \par\pard\qj\li1411\sb0\sl-252\slmult0 \par\pard\qj\li1411\sb0\sl-252\slmult0 \par\pard\qj\li1411\sb0\sl-252\slmult0 \par\pard\qj\li1411\ri1252\sb68\sl-252\slmult0 \up0 \expndtw-1\charscalex100 Even beyond these protections, Funds are permitted to redeem "in-kind" under certain circumstances (by \up0 \expndtw0\charscalex100 delivering securities and other investments as opposed to cash), and many make in-kind redemptions to \up0 \expndtw0\charscalex103 institutional investors as a matter of course. This allows Funds to satisfy redemption requests without \up0 \expndtw0\charscalex105 having to sell portfolio holdings, which could be particularly helpful in addressing situations where \up0 \expndtw0\charscalex104 institutional investors in the Funds wish to redeem their holdings and market liquidity for the Fund's \up0 \expndtw-1\charscalex100 assets has been impaired. Moreover, it is typical for Funds to enter into credit agreements with banks that \up0 \expndtw-1\charscalex100 provide committed lines of credit to the Funds for use in emergency situations such as to meet unforeseen \up0 \expndtw-1\charscalex100 redemption activity, which the Report itself notes in several places.50 In practice, it is extremely rare for \up0 \expndtw-6\charscalex100 Funds to have to draw on these lines of credit.51 \par\pard\ql \li2145\sb248\sl-253\slmult0\tx2856 \up0 \expndtw-10\charscalex88 3. \tab \up0 \expndtw-3\charscalex100 The Report Overstates the Impact of Funds' Use of Leverage \par\pard\qj \li1430\ri1254\sb222\sl-260\slmult0 \up0 \expndtw0\charscalex100 The Report contends that leverage is a source of risk and can contribute to shocks. However, the risks of \up0 \expndtw-2\charscalex100 leverage are drastically overstated when it comes to Funds, and the Report provides no analysis or support \up0 \expndtw0\charscalex104 for the contention that leverage undertaken by any Fund in particular or Funds in general materially \up0 \expndtw-4\charscalex100 contributes to systemic risk. \par\pard\qj \li1440\ri1309\sb229\sl-250\slmult0 \up0 \expndtw0\charscalex100 Funds are subject to Section 18 of the 1940 Act and related SEC Staff guidance, which require Funds to \line \up0 \expndtw0\charscalex103 limit leverage by requiring that they maintain 300 percent asset coverage for bank borrowings and to \line \up0 \expndtw0\charscalex103 earmark suficient liquid assets on a mark-to-market basis to "cover" \up0 \expndtw0\charscalex103 100% of a Fund's obligations \par\pard\qj \li1444\ri1257\sb2\sl-260\slmult0 \up0 \expndtw-1\charscalex100 created by derivatives and other transactions that create leverage. These requirements effectively prevent \up0 \expndtw-4\charscalex100 Funds from taking on excessive leverage. \par\pard\qj \li1449\ri1242\sb226\sl-253\slmult0 \up0 \expndtw0\charscalex100 The Repot cites two examples of Funds that ran into trouble during the crisis partially as a result of their \up0 \expndtw-1\charscalex100 investments in derivatives that had the effect of increasing leverage. However, the first example resulted \up0 \expndtw-1\charscalex100 in an SEC enforcement action for inadequate disclosure and the other resulted in a signiicant out of court \up0 \expndtw0\charscalex102 settlement for a stable NAV fund. The fact that the irst example resulted in enforcement action shows \up0 \expndtw0\charscalex103 the rarity of the problem and that it represented a situation where there was alleged wrongdoing. The \up0 \expndtw-1\charscalex100 second example related to a stable NAV fund, which was unregistered, having no bearing on an analysis \up0 \expndtw-3\charscalex100 relating to floating NAV, registered Funds and out of the scope of the Report. \par\pard\qj \li2174\sb0\sl-220\slmult0 \par\pard\qj\li2174\sb0\sl-220\slmult0 \par\pard\qj\li2174\sb0\sl-220\slmult0 \par\pard\qj\li2174\sb0\sl-220\slmult0 \par\pard\qj\li2174\ri1240\sb155\sl-220\slmult0 \up0 \expndtw-10\charscalex95 22 \up0 \expndtw-7\charscalex100 (e), a fund was improperly computing its net asset value and selling and redeeming its shares, among \line \up0 \expndtw-7\charscalex100 other problems); SEC v. Falcon Fund, Inc., SEC Litigation Release No. 6417 (July 2, \up0 \expndtw-9\charscalex100 1974) (seeking to \par\pard\qj \li2179\ri1217\sb10\sl-233\slmult0 \up0 \expndtw-7\charscalex100 have a receiver appointed with respect to a fund in violation of Section 22(3) for suspending the right of \up0 \expndtw-9\charscalex96 redemption, as well as other issues); SEC v. Financial Fund, Inc., SEC Litigation Release No. 6359 (May 8, \up0 \expndtw-8\charscalex100 1974) (seeking to have a receiver appointed when, among other items, a fund had suspended the right of \up0 \expndtw-10\charscalex94 redemption and violated Section 22(e)). \par\pard\li1478\sb239\sl-253\slmult0\fi0\tx2183 \up3 \expndtw-6\charscalex95 \ul0\nosupersub\cf9\f10\fs14 50\tab \dn4 \expndtw-10\charscalex95 \ul0\nosupersub\cf5\f6\fs22 See Report at 7, 12 and 21.\par\pard\li1478\sb218\sl-253\slmult0\fi4\tx2193 \up2 \expndtw-6\charscalex95 \ul0\nosupersub\cf9\f10\fs14 51\tab \dn4 \expndtw-9\charscalex96 \ul0\nosupersub\cf5\f6\fs22 Footnote 5 of the Report contends that these lines of credit may have the effect of allowing fund managers\par\pard\qj \li2188\ri1242\sb0\sl-230\slmult0 \up0 \expndtw-6\charscalex100 to decrease the amount of cash on hand, creating potential liquidity risks. However, in our experience, \line \up0 \expndtw-6\charscalex100 lines of credit are rarely used by Funds and generally do not factor into the manner in which Funds are \line \up0 \expndtw-10\charscalex91 invested. \par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg17}{\bkmkend Pg17}\par\pard\sect\sectd\sbknone\cols2\colno1\colw2672\colsr160\colno2\colw9268\colsr160\ql \li676\sb0\sl-598\slmult0 \par\pard\ql \li676\sb47\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2131\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex103 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\ql \li2111\sb0\sl-253\slmult0 \par\pard\ql \li2111\sb0\sl-253\slmult0 \par\pard\ql \li2111\sb0\sl-253\slmult0 \par\pard\ql \li2111\sb0\sl-253\slmult0 \par\pard\ql \li2111\sb0\sl-253\slmult0 \par\pard\ql \li2111\sb99\sl-253\slmult0 \up0 \expndtw-9\charscalex100 \ul0\nosupersub\cf5\f6\fs22 4.\par\pard\column \ql \li8817\sb0\sl-253\slmult0 \par\pard\ql \li8817\sb0\sl-253\slmult0 \par\pard\ql \li6005\sb174\sl-253\slmult0 \up0 \expndtw-2\charscalex100 Ms. Elizabeth Murphy\par\pard\ql \li6461\sb1\sl-253\slmult0 \up0 \expndtw0\charscalex101 October 31,2013\par\pard\ql \li7306\sb1\sl-249\slmult0 \up0 \expndtw-3\charscalex100 Page 17\par\pard\ql \li2832\sb0\sl-253\slmult0 \par\pard\ql \li2832\sb0\sl-253\slmult0 \par\pard\ql \li2832\sb0\sl-253\slmult0 \par\pard\ql \li2832\sb0\sl-253\slmult0 \par\pard\ql \li2832\sb0\sl-253\slmult0 \par\pard\ql \li20\sb67\sl-253\slmult0 \up0 \expndtw-2\charscalex100 The Report Fails to Substantiate Impacts of Funds' Counterparty and Credit Risks \par\pard\sect\sectd\sbknone \qj \li1401\ri1277\sb243\sl-252\slmult0 \up0 \expndtw0\charscalex100 The Report asserts that counterparty and credit risk are signiicant for the asset management industry and \up0 \expndtw0\charscalex102 for Funds. However, it fails to explain with any specificity what systemic inancial stability concerns it \up0 \expndtw-1\charscalex100 has with regard to the possibility that Funds will transmit or amplify risk in other market sectors or to the \up0 \expndtw-1\charscalex100 broader financial markets. Moreover, the Report does not specify the characteristics or factors that might \up0 \expndtw0\charscalex100 make certain counterparties more risky than others, nor does it explain what types of counterparty risks \up0 \expndtw-4\charscalex100 exist or how these relate to the Fund industry. \par\pard\qj \li1416\ri1313\sb248\sl-252\slmult0 \up0 \expndtw0\charscalex117 "Funds are not speciically required to conduct ongoing credit analysis of their derivatives \up0 \expndtw0\charscalex100 counterparties,"52 according to the Report. While there is no explicit regulation or Rule under the 1940 \up0 \expndtw0\charscalex103 Act that addresses this issue, investment advisers, on behalf of Funds, routinely engage in substantial \up0 \expndtw0\charscalex102 counterparty credit analysis as part of investing Fund assets. Moreover, in our experience, most major \up0 \expndtw0\charscalex100 investment advisers and Fund families have investment risk management programs that are designed in \up0 \expndtw-2\charscalex100 large part to consider and assess counterparty risk, particularly ater the 2008 crisis. \par\pard\ql \li2145\sb228\sl-253\slmult0\tx2851 \up0 \expndtw-10\charscalex85 5. \tab \up0 \expndtw-2\charscalex100 The Report Overstates Funds' Role in Market Disruptions rom Fire Sales \par\pard\qj \li1430\ri1259\sb247\sl-254\slmult0 \up0 \expndtw0\charscalex104 The Report contends that ire sales lead to higher demand for liquidity, which can magnify or spread \up0 \expndtw0\charscalex103 quickly across asset classes and inancial institutions. However, it again provides no empirical data to \up0 \expndtw0\charscalex103 support the belief that fire sales could cause systemic impacts, or the role a Fund or Funds in general \up0 \expndtw0\charscalex105 would be likely to play in such a situation. Moreover, there is no explanation offered to identify the \up0 \expndtw0\charscalex104 circumstances in which a Fund would be forced to engage in a ire sale, despite all the structural and \up0 \expndtw0\charscalex102 regulatory protections discussed above. These protections provide Funds with great flexibility to deal \up0 \expndtw0\charscalex100 with redemption requests, including portfolio liquidity requirements and the ability to redeem shares in\up0 \expndtw-4\charscalex100 kind, which would avoid the need to sell assets to meet redemptions. \par\pard\qj \li1444\ri1260\sb222\sl-260\slmult0 \up0 \expndtw0\charscalex100 Furthermore, there is no data provided to support its belief that fire sales in a particular sector would be \up0 \expndtw0\charscalex100 likely to impact systemic inancial stability or to measure any hypothetical impacts. The Report fails to \up0 \expndtw0\charscalex100 recognize that Funds have incentives to avoid ire sales. Harm to a market in which a Fund participates \up0 \expndtw-4\charscalex100 could also constitute harm to the Fund, including its NAV. \par\pard\qj \li1454\ri1259\sb225\sl-254\slmult0 \up0 \expndtw0\charscalex105 Consistent with flaws in other aspects of the Report, the report fails to distinguish among markets, \line \up0 \expndtw-2\charscalex100 sectors, and investment vehicles to a degree that would be necessary to draw any useful conclusions. Fire \line \up0 \expndtw0\charscalex100 sales are only likely to be a potential issue in markets that are prone to liquidity problems. Any analysis \line \up0 \expndtw0\charscalex102 of the risks and potential harms of ire sales from Funds must be limited to those Funds that operate in \line \up0 \expndtw0\charscalex100 those markets and represent large enough participants to make an impact. Futhermore, the causal link to \line \up0 \expndtw-1\charscalex100 Funds must be clearly modeled and measured - as should its potential impact on the financial system and \line \up0 \expndtw0\charscalex104 the economy and the intended effects of alternative regulatory responses. The Report simply fails to \line \up0 \expndtw-5\charscalex100 make these basic distinctions. \par\pard\li1473\sb0\sl-253\slmult0\par\pard\li1473\sb0\sl-253\slmult0\par\pard\li1473\sb0\sl-253\slmult0\par\pard\li1473\sb0\sl-253\slmult0\par\pard\li1473\sb0\sl-253\slmult0\par\pard\li1473\sb33\sl-253\slmult0\fi0\tx2183 \up2 \expndtw-6\charscalex93 \ul0\nosupersub\cf9\f10\fs14 52\tab \dn4 \expndtw-10\charscalex93 \ul0\nosupersub\cf5\f6\fs22 Report at 21.\par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg18}{\bkmkend Pg18}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8705\colsr160\colno2\colw3235\colsr160\ql \li715\sb0\sl-598\slmult0 \par\pard\ql \li715\sb47\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2179\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex101 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\column \ql \li8865\sb0\sl-253\slmult0 \par\pard\ql \li8865\sb0\sl-253\slmult0 \par\pard\ql \li20\sb184\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Ms. Elizabeth Murphy\par\pard\ql \li467\sb1\sl-253\slmult0 \up0 \expndtw-3\charscalex100 October 31, 2013\par\pard\ql \li1307\sb1\sl-249\slmult0 \up0 \expndtw-3\charscalex100 Page 18 \par\pard\sect\sectd\sbknone \qj \li1435\sb0\sl-260\slmult0 \par\pard\qj\li1435\sb0\sl-260\slmult0 \par\pard\qj\li1435\sb0\sl-260\slmult0 \par\pard\qj\li1435\sb0\sl-260\slmult0 \par\pard\qj\li1435\sb0\sl-260\slmult0 \par\pard\qj\li1435\ri1249\sb11\sl-260\slmult0\fi9 \up0 \expndtw0\charscalex100 Moreover, it does not provide any answers to the ire sale problem. It fails to provide any justiication for \up0 \expndtw0\charscalex100 the notion that asset managers or Funds should be uniquely restricted in their ability in times of market \up0 \expndtw-4\charscalex100 stress to dispose of securities. \par\pard\ql \li1444\sb226\sl-253\slmult0\tx2160 \up0 \expndtw-6\charscalex100 V. \tab \up0 \expndtw0\charscalex104 \ul0\nosupersub\cf6\f7\fs22\ul The Report Represents Signiicant Legal and Administrative Defects \par\pard\qj \li1449\ri1240\sb246\sl-255\slmult0\fi4 \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf5\f6\fs22 The Repot is a classic administrative attempt to put the cart before the horse and short-cut a sound and \up0 \expndtw0\charscalex100 fair development of an administrative record upon which determinations may be made. To that extent, it \up0 \expndtw-1\charscalex100 suggests to us that perhaps its purpose may be goal-oriented rather than analytically driven. Furthermore, \up0 \expndtw-1\charscalex100 it is impossible to comment effectively about risks and market characteristics when no deinitions, metrics \up0 \expndtw-4\charscalex100 or standard formats have been established. \par\pard\ql \li1463\sb227\sl-253\slmult0 \up0 \expndtw-2\charscalex100 In that regard, the Report's legal and procedural defects, among others, fall into several categories. \par\pard\li2193\sb251\sl-253\slmult0\fi0\tx2889 \up0 \expndtw-1\charscalex100 1.\tab \up0 \expndtw0\charscalex100 The Report is arbitrary and capricious given its numerous defects, including among\par\pard\li2193\sb0\sl-250\slmult0\fi700 \up0 \expndtw-1\charscalex100 others set forth herein:\par\pard\li2193\sb242\sl-253\slmult0\fi700\tx3609 \up0 \expndtw-1\charscalex100 a.\tab \up0 \expndtw0\charscalex100 Its failure to separately consider and analyze different segments of the asset\par\pard\li2193\sb0\sl-250\slmult0\fi1411 \up0 \expndtw-1\charscalex100 management industry;\par\pard\li2193\sb247\sl-253\slmult0\fi700\tx3604 \up0 \expndtw-1\charscalex100 b.\tab \up0 \expndtw-1\charscalex100 Its signiicant and admitted data gaps;\par\pard\li2193\sb242\sl-253\slmult0\fi705\tx3609 \up0 \expndtw-1\charscalex100 c.\tab \up0 \expndtw-1\charscalex100 Insuficient empirical data to support critical assertions;\par\pard\li2193\sb241\sl-253\slmult0\fi710\tx3614 \up0 \expndtw-1\charscalex100 d.\tab \up0 \expndtw-1\charscalex100 Its highly speculative claims; and\par\pard\li2193\sb241\sl-253\slmult0\fi710\tx3614 \up0 \expndtw-1\charscalex100 e.\tab \up0 \expndtw0\charscalex100 The absence of identiied authors whose credentials, experience, and potential\par\pard\li2193\sb0\sl-250\slmult0\fi1420 \up0 \expndtw-1\charscalex100 biases may be evaluated.\par\pard\li2193\sb242\sl-253\slmult0\fi0\tx2908 \up0 \expndtw-1\charscalex100 2.\tab \up0 \expndtw0\charscalex100 The Repot jumps the gun, is improper and prevents meaningful public analysis and\par\pard\li2193\sb0\sl-250\slmult0\fi715 \up0 \expndtw0\charscalex100 comment to the extent that neither FSOC nor OFR have complied with Sections 153 and\par\pard\li2193\sb2\sl-253\slmult0\fi739 \up0 \expndtw0\charscalex100 154 of the DFA by first adopting rules, regulations or orders which, among other things:\par\pard\li2193\sb242\sl-253\slmult0\fi715\tx3628 \up0 \expndtw-1\charscalex100 a.\tab \up0 \expndtw-1\charscalex100 Standardize the types and formats of data repoted and collected;\par\pard\li2193\sb241\sl-253\slmult0\fi715\tx3619 \up0 \expndtw-1\charscalex100 b.\tab \up0 \expndtw-1\charscalex100 Develop tools for risk measurement and monitoring;\par\pard\li2193\sb246\sl-253\slmult0\fi724\tx3623 \up0 \expndtw-1\charscalex100 c.\tab \up0 \expndtw0\charscalex100 Provide for coordination with FSOC member agencies in regard to standardizing\par\pard\li2193\sb0\sl-250\slmult0\fi1425 \up0 \expndtw-1\charscalex100 the types and formats of data reported and collected; and\par\pard\li2193\sb247\sl-253\slmult0\fi724\tx3623 \up0 \expndtw-1\charscalex100 d.\tab \up0 \expndtw-1\charscalex100 Address the conidentiality, information security, and sharing of data.\par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg19}{\bkmkend Pg19}\par\pard\sect\sectd\sbknone\cols2\colno1\colw8792\colsr160\colno2\colw3148\colsr160\ql \li806\sb0\sl-598\slmult0 \par\pard\ql \li806\sb76\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2265\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex101 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\ql \li1516\sb0\sl-253\slmult0 \par\pard\ql \li1516\sb0\sl-253\slmult0 \par\pard\ql \li1516\sb0\sl-253\slmult0 \par\pard\ql \li1516\sb0\sl-253\slmult0 \par\pard\ql \li1516\sb0\sl-253\slmult0 \par\pard\ql \li1516\sb132\sl-253\slmult0\tx2226 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\fs22 VI.\tab \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf6\f7\fs22\ul Requests for SEC Action\par\pard\column \ql \li8952\sb0\sl-253\slmult0 \par\pard\ql \li8952\sb0\sl-253\slmult0 \par\pard\ql \li8952\sb0\sl-253\slmult0 \par\pard\ql \li20\sb27\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf5\f6\fs22 Ms. Elizabeth Murphy\par\pard\ql \li471\sb6\sl-253\slmult0 \up0 \expndtw-2\charscalex100 October 31, 2013\par\pard\ql \li1311\sb1\sl-253\slmult0 \up0 \expndtw-2\charscalex100 Page 19 \par\pard\sect\sectd\sbknone \qj \li1507\ri1135\sb243\sl-250\slmult0\fi9 \up0 \expndtw0\charscalex103 Much of the activity discussed in the Report falls under the primary jurisdiction of the SEC under the \up0 \expndtw0\charscalex108 federal securities laws. The SEC has nearly eight decades of experience in the areas purportedly \up0 \expndtw-1\charscalex100 addressed by the Report. We believe that the numerous flaws in the Report indicate that the writers of the \up0 \expndtw-1\charscalex100 Report may not have fully taken advantage of the SEC's comprehensive understanding and knowledge of \up0 \expndtw-6\charscalex100 the asset management industry.53 \par\pard\qj \li1511\ri1223\sb242\sl-260\slmult0\fi4 \up0 \expndtw-1\charscalex100 We believe it is essential that any consideration by the FSOC of the asset management industry be based \up0 \expndtw0\charscalex106 upon a fair, objective, and knowledgeable description and analysis of the multiple segments of the \up0 \expndtw-2\charscalex100 industry. Any such analysis must inevitably have the full benefit of the SEC's input. \par\pard\qj \li1511\sb0\sl-245\slmult0 \par\pard\qj\li1511\ri1220\sb8\sl-245\slmult0 \up0 \expndtw0\charscalex102 Accordingly, we request that the SEC consider the public comments it receives in regard to the Repot. \up0 \expndtw-1\charscalex100 We request that based on the SEC's expetise regarding the asset management industry and the comments \up0 \expndtw0\charscalex102 it receives on the Repot, that it advise the OFR and the FSOC that the Report is fundamentally flawed \up0 \expndtw0\charscalex104 and cannot be relied on. We futher request that the SEC request that the FSOC request that the OFR \up0 \expndtw0\charscalex100 withdraw the Repot. \par\pard\qj \li1507\sb0\sl-250\slmult0 \par\pard\qj\li1507\ri1219\sb21\sl-250\slmult0\fi4 \up0 \expndtw0\charscalex104 In the alternative, we request that the SEC request that the OFR to invite comments from the public \line \up0 \expndtw-2\charscalex100 directly to it regarding the Report and take these comments fully and appropriately into account when and \line \up0 \expndtw0\charscalex102 if it produces any new repots regarding the risks applicable to the asset management industry. In such \line \up0 \expndtw0\charscalex100 circumstances, we request that the OFR consult in a full and open manner with the SEC staff and accept \line \up0 \expndtw0\charscalex109 and consider comments and suggestions rom the SEC regarding all relevant aspects of the asset \line \up0 \expndtw0\charscalex100 management industry in connection with any future publications the OFR may issues or other actions it \line \up0 \expndtw-5\charscalex100 may take. \par\pard\ql \li1502\sb248\sl-253\slmult0 \up0 \expndtw0\charscalex121 VII. \ul0\nosupersub\cf6\f7\fs22\ul Conclusion \par\pard\qj \li1502\ri1207\sb250\sl-250\slmult0\fi4 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf5\f6\fs22 For all the reasons set forth above, the Report is unreliable and should not serve as the basis for policy \up0 \expndtw0\charscalex100 action of any type. Any attempt to do so lays the groundwork for signiicant administrative challenges to \up0 \expndtw-4\charscalex100 the work of OFR and the FSOC.\par\pard\sect\sectd\sbknone\cols2\colno1\colw2048\colsr160\colno2\colw9892\colsr160\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb0\sl-138\slmult0 \par\pard\ql \li1502\sb84\sl-138\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs12 53\par\pard\column \ql \li2208\sb0\sl-198\slmult0 \par\pard\ql \li2208\sb0\sl-198\slmult0 \par\pard\ql \li2208\sb0\sl-198\slmult0 \par\pard\ql \li2208\sb0\sl-198\slmult0 \par\pard\ql \li2208\sb0\sl-198\slmult0 \par\pard\ql \li2208\sb0\sl-198\slmult0 \par\pard\ql \li2208\sb0\sl-198\slmult0 \par\pard\ql \li2208\sb0\sl-198\slmult0 \par\pard\ql \li2208\sb0\sl-198\slmult0 \par\pard\ql \li2208\sb0\sl-198\slmult0 \par\pard\ql \li2208\sb0\sl-198\slmult0 \par\pard\ql \li2208\sb0\sl-198\slmult0 \par\pard\ql \li20\sb119\sl-198\slmult0 \up0 \expndtw-8\charscalex100 \ul0\nosupersub\cf5\f6\fs22 See Sarah N. Lynch, SEC Sees Flaws in New Treasury Asset Manager Report: Sources, Reuters (Oct. 7,\par\pard\ql \li20\sb8\sl-240\slmult0\tx1033\tx2247\tx2885 \up0 \expndtw-10\charscalex93 2013),\tab \up0 \expndtw-10\charscalex96 available\tab \up0 \expndtw-6\charscalex100 at\tab \up0 \expndtw-10\charscalex95 http://www.reuters.com/article/2013/10/07/us-sec-assetmanager-report-\par\pard\qj \li24\ri1222\sb0\sl-224\slmult0\fi4 \up0 \expndtw-8\charscalex100 idUSBRE9960XD20131007. Indeed, a United States Government Accountability Office ("GAO") report \up0 \expndtw-6\charscalex100 concluded that promoting coordination among FSOC members (including the SEC) is "critical" to the \up0 \expndtw-9\charscalex98 ability of the OFR and the FSOC to "achieve their missions." GAO, Financial Stability: New Council and \up0 \expndtw-9\charscalex96 Research Ofice Should Strengthen the Accountability and Transparency of Their Decisions (GAO-12-886; \up0 \expndtw-10\charscalex92 Sept. 2012) at 54. \par\pard\sect\sectd\fs24\paperw12240\paperh15840{\bkmkstart Pg20}{\bkmkend Pg20}\par\pard\sect\sectd\sbknone\cols2\colno1\colw6411\colsr160\colno2\colw5529\colsr160\ql \li744\sb0\sl-598\slmult0 \par\pard\ql \li744\sb76\sl-598\slmult0 \up0 \expndtw0\charscalex107 \ul0\nosupersub\cf1\f2\fs52 Dechert\par\pard\ql \li2203\sb0\sl-162\slmult0 \up0 \expndtw0\charscalex101 \ul0\nosupersub\cf4\f5\fs18 LLP\par\pard\ql \li1468\sb0\sl-253\slmult0 \par\pard\ql \li1468\sb0\sl-253\slmult0 \par\pard\ql \li1468\sb0\sl-253\slmult0 \par\pard\ql \li1468\sb0\sl-253\slmult0 \par\pard\ql \li1468\sb0\sl-253\slmult0 \par\pard\ql \li1468\sb113\sl-253\slmult0 \up0 \expndtw-4\charscalex100 \ul0\nosupersub\cf5\f6\fs22 We appreciate your consideration of our comments.\par\pard\column \ql \li8884\sb0\sl-253\slmult0 \par\pard\ql \li8884\sb0\sl-253\slmult0 \par\pard\ql \li2333\sb227\sl-253\slmult0 \up0 \expndtw-2\charscalex100 Ms. Elizabeth Murphy\par\pard\ql \li2780\sb1\sl-253\slmult0 \up0 \expndtw-2\charscalex100 October 31, 2013\par\pard\ql \li3624\sb2\sl-253\slmult0 \up0 \expndtw-3\charscalex100 Page 20\par\pard\ql \li6835\sb0\sl-253\slmult0 \par\pard\ql \li6835\sb0\sl-253\slmult0 \par\pard\ql \li6835\sb0\sl-253\slmult0 \par\pard\ql \li6835\sb0\sl-253\slmult0 \par\pard\ql \li6835\sb0\sl-253\slmult0 \par\pard\ql \li6835\sb0\sl-253\slmult0 \par\pard\ql \li6835\sb0\sl-253\slmult0 \par\pard\ql \li6835\sb0\sl-253\slmult0 \par\pard\ql \li284\sb46\sl-253\slmult0 \up0 \expndtw-1\charscalex100 Sildercly,\par\pard\ql \li6571\sb0\sl-92\slmult0 \par\pard\ql \li6571\sb0\sl-92\slmult0 \par\pard\ql \li6571\sb0\sl-92\slmult0 \par\pard\ql \li6571\sb0\sl-92\slmult0 \par\pard\ql \li6571\sb0\sl-92\slmult0 \par\pard\ql \li20\sb1\sl-92\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf10\f11\fs8 /\par\pard\ql \li519\sb168\sl-253\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf5\f6\fs22 omas P. Vartanian \par\pard\sect\sectd\fs24}